74384 Chinese FDI in Ethiopia A World Bank Survey November 2012 Africa Region the World Bank Chinese FDI in Ethiopia A World Bank Survey November 2012 Africa Region the World Bank This survey report was produced by a team led by Michael Geiger (Country Economist) and Chorching Goh (Lead Economist) with the following team members: Jingyi Zhang (Junior Professional Associate), Xiaochen Fu (consultant), Danqing Zhu (consultant), Jingyang Zhang (consultant), and Su Qian (consultant). The report has benefitted from comments from Lars Christian Moller (Lead Economist) and Asya Akhlaque (Senior Economist), and it was produced under the guidance of Guang Zhe Chen (Country Director for Ethiopia). Table of Contents Executive Summary.................................................................................................................................... v Background................................................................................................................................................... 1 Foreign Investment in Ethiopia and Experiences from other Countries......................................................................1 A Good Time for Ethiopia to Attract FDI Inflows and Integrate into Global Production Chains...............................3 Chinese FDI in Ethiopia: Opportunities and Challenges............................................................................................3 Previous Research on Chinese FDI into Africa............................................................................................................5 Methodology and objective of the survey on Chinese FDI in Ethiopia.................. 7 Setting the stage: Main findings from the General Ethiopia Enterprise Survey................................................................................................................... 9 Stylized facts: The footprint of Chinese invested enterprises in Ethiopia..........11 Investment Volume...................................................................................................................................................11 Ownership Types......................................................................................................................................................11 Sector Focus of Chinese investment..........................................................................................................................11 Employment, Salaries, and Training..........................................................................................................................12 Trade Activities: Import and Exports........................................................................................................................12 FDI motivation analysis: What attracts Chinese firms to invest in Ethiopia?.......15 Four Principle Drivers..............................................................................................................................................15 FDI obstacles analysis: Opportunities to improve Chinese investment into Ethiopia................................................................................................ 19 Six Principle Obstacles..............................................................................................................................................20 Case studies.................................................................................................................................................. 25 Ethiopia’s approach to Special Economic Zones – Eastern Industrial Zone (EIZ).....................................................25 Huajian – A Chinese Investor in Shoe Manufacturing for Exports............................................................................26 Summary and policy conclusions.................................................................................................. 29 References.................................................................................................................................................... 31 Annexes Annex 1: Selected Breakdown of Motives of Chinese Investment into Ethiopia........................................................34 Annex 2: Selected Breakdown of Obstacles for Chinese Investment into Ethiopia....................................................39 iv Chinese FDI in Ethiopia List of Boxes Box 1: FDI policies in Ethiopia and China.....................................................................................................................4 Box 2: Two Main Problems in Customs and Trade Regulations....................................................................................19 Box 3: Perceived Issues in the Tax Administration........................................................................................................22 List of Figures Figure 1: FDI in Percent of GDP in Selected Countries, Average per Year......................................................................1 Figure 2: The Share of FDI in ASEAN Countries, 1990 to 2009....................................................................................2 Figure 3: Direct Investment from China to Ethiopia, 2004 to 2010...............................................................................5 Figure 4: Top 10 Business Environment Constraints......................................................................................................9 Figure 5: Enterprise Financing Sources for Investment.................................................................................................10 Figure 6: Electricity Provision and Service Delays.........................................................................................................10 Figure 7: Custom Efficiency.........................................................................................................................................10 Figure 8: Regulation Burden........................................................................................................................................10 Figure 9: Ownership types of Chinese firms in Ethiopia...............................................................................................11 Figure 10: Sectoral Distribution of Chinese Invested Enterprises in Ethiopia...............................................................12 Figure 11: Summary Overview of Motives to Invest in Ethiopia...................................................................................16 Figure 12: Largest Obstacles for Chinese Firms in Ethiopia..........................................................................................19 Figure 13: Obstacles and Opportunities to Improve: by Firm Size................................................................................20 Figure 14: Obstacles and Opportunities to Improve: by Industry.................................................................................20 Figure 15: Days Required for Customs Clearance, Selected Countries..........................................................................21 Figure 16: Investor Perceptions on Foreign Exchange Risks..........................................................................................21 Figure 17: Average Education of Workers in Chinese Invested Enterprises in Ethiopia.................................................22 Figure 18: Doing Business Index – Getting Credit.......................................................................................................23 Figure 19: Senior Management Time Spent on Handling Government Relations (2011).............................................23 Figure 20: Investors’ Willingness to Stay in Ethiopia....................................................................................................23 List of Tables Table 1: A Comparison of Chinese and Ethiopian FDI Regulation................................................................................4 Table 2: Investment Volumes of Chinese Firms: Distribution.......................................................................................11 Table 3: Numbers of Ethiopian Employees in Chinese Invested Enterprises.................................................................12 Table 4: Number of Companies Surveyed: Distribution by Firm Size...........................................................................12 Executive Summary Background important FDI host countries over the past three decades, some of them are slowly losing their competi- Chinese Foreign Direct Investment (FDI) into tive advantage due to increasing costs of land, stricter Africa is on the rise and Ethiopia is at the forefront regulatory compliance, and increasing cost of labor. of this trend. On request of the Government, the Ethiopia has the potential to step in—but there is World Bank surveyed 69 Chinese enterprises doing strong competition from within lower income coun- business in Ethiopia with a 95-question survey in tries in Asia and other parts of the world, including May/June 2012. The survey covered various aspects Africa—and promote itself as a an alternative hub for of the foreign direct investment climate in Ethiopia, global companies to find new and favorable production including infrastructure, sales and supplies, land, centers with a clear cost advantage and a stable eco- crime, competition, finance, human resources, and nomic outlook. Ethiopia’s cheap and abundant labor, questions about general opportunities and constraints privileged access to high-income markets, and growing for doing business in Ethiopia. This report summarizes domestic and regional markets add to its attraction as the results of survey and provides policy suggestions a FDI host country. in light of the analysis; the report also provides some China’s economic cooperation with Ethiopia broader background of the expected benefits of FDI has expanded rapidly over the past decade. In 2011, into Ethiopia as well as current policies and approaches China was both the largest import and largest export to promote incoming investment. trading partner of Ethiopia. Similarly, China’s invest- Experiences from East Asian countries show that ment to Ethiopia has increased steadily. According growth cannot be sustained without technological to China’s Ministry of Commerce, FDI from China and industrial upgrading and structural transforma- to Ethiopia increased from virtually zero in 2004 tion of the country’s economic activities. Attracting to an annual amount of US$58.5 million in 2010 FDI is generally seen as an integral part of the develop- (US$74 million in 2009). Behind the figure is a growing ment policy mix of successful emerging economies that and vibrant Chinese business community represented leads the way to the required sustained economic trans- by the Chinese Chamber of Commerce in Addis Ababa. formation. But looking at the FDI levels (in percent of The expansion of ties between the two countries GDP) currently observed in Ethiopia, and specifically reflects the structural change happening in both the in comparison to successful East Asian countries, it is Chinese and the Ethiopian economies. China has clear that there is an opportunity to improve the pro- stunned the world with its growth miracle, driven by motion of incoming foreign investment. labor-intensive produce exports during the past three The starting process of a global industrial redis- decades. However, economic success brings with it ris- tribution is providing an opportunity for Ethiopia ing labor costs across all segments of the labor market, to attract FDI and upgrade its economic structure thereby eroding competitiveness in low skill, labor by shifting productivity from East Asian countries intensive production in China. Estimates show that to Ethiopia. Although East Asian countries have been China’s graduation from low-skilled manufacturing vi Chinese FDI in Ethiopia jobs could free up nearly 100 million jobs, more than making the market there look very attractive for double the number of manufacturing employment in Chinese investors. low-income countries. Ethiopia needs to get ready to 3. To maximize cross-border investment incen- step into this opportunity with both its huge popula- tives provided by the Ethiopian and Chinese tion and low labor costs. governments. During the last decade, the Ethio- The economic cooperation between the two pian government has continuously provided FDI countries has also been facilitated by the strong incentives, such as tax holidays and tariff-free political support from both governments. China’s policies for FDI equipment imports. On the other desire to anchor its African investment in Ethiopia hand, the Chinese government has also adopted comes both from economic and political consider- the “China Goes Global Policy,� which awards ations. On the other hand, the Ethiopian government Chinese firms investing abroad with tax credits in is very keen on looking for insights from the East Asian China. These incentives have proved to be a large development model and expects to learn much from motivation for Chinese firms’ investment in Ethi- China’s experience over the past three decades (as much opia, especially for the manufacturing industry. as Korea’s) to further its own economic development. 4. To make a strategic move of the parent company into the African market and to invest in favor Main Survey Findings of the stable political environment of Ethiopia. Overall, survey respondents think the Ethiopian At the firm level, the survey shows that there are government provides a stable political environment four principal drivers of Chinese FDI in Ethiopia: for the firms to do business smoothly around the 1. To take advantage of a good understanding of year. Eighty-one percent of the firms from manu- the investment climate gained from entrepre- facturing, service, and construction industries agree neurs’ social networks. The survey finds that the that they experienced little or no obstacles in politi- social networks of Chinese investors function as cal stability over the course of their engagement. a significant factor in making their investment decision in favor of Ethiopia. Strikingly, potential The motives to invest in Ethiopia are dampened investment opportunities seem to barely travel by six principal obstacles that Chinese invested through formal channels, such as through the enterprises face in Ethiopia: investment promotion agency or other govern- 1. Trade regulation and customs clearance effi- ment agencies. ciency. Due to the lack of local supply network, 2. To take advantage of the perceived opportuni- Chinese firms in Ethiopia heavily rely on imported ties provided by the current state of the Ethio- supplies and materials. But current regulations are pian economy; this includes the limited market not designed to facilitate fast customs clearance of capacity and market competition, cheap labor, imported materials. As a result, trade and customs cheap land, and an expanding Ethiopian market. regulation is regarded the main issue impeding The surveyed firms claim that increasing compe- Chinese FDI in Ethiopia. tition, intensified trade competition, rising labor 2. Perceived foreign exchange rate risks deter costs, and currency appreciation in China have investment. Restrictions on foreign currency made it more and more difficult to do business transaction and conversion, in combination with in the Chinese market over the past years. At the perceived uncertainty over the foreign exchange same time, the production capacity in Ethiopia is rate path, deters new investment and discourages still low, and the local market is rapidly expanding, existing Chinese invested firms from increasing Executive Summary vii investments. As light manufacturing/labor inten- (SOEs) spend less than 10 percent of their time, sive firms rely more heavily on imported supplies, somewhat indicating a special, possibly preferen- they are specifically concerned about foreign tial status for SOEs. exchange risks. 3. Tax administration inconsistency and ineffi- The survey findings show that despite the per- ciency. Many Chinese firms claim to suffer from ceived obstacles, Ethiopia is an attractive business inconsistency of tax law explanation and frequent destination for Chinese enterprises. Almost half of law amendments. More than 70 percent of the Chinese investors are in for the long run (10 years or surveyed firms find the inconsistency of tax law more) and plan to increase investment in Ethiopia explanation and the frequent law amendment a over coming years. major obstacle to doing business. 4. Labor education impedes productivity and skill Policy Conclusions transfer. Ethiopian workers hired by Chinese invested companies on average have an education Addressing identified obstacles could help Ethio- of six to seven years, much lower than the average pia to take better advantage of foreign investors education of Chinese workers. In order to fill in in order to accelerate the shift from a predominantly the gap of inadequate education of local workers, low-productivity agriculture-based economy towards a Chinese firms usually hire Chinese lead workers higher-productivity manufacturing and export-based with 10–12 years education and provide on-site economy. Experiences in successful countries around trainings for Ethiopian employees. the world, and especially East Asia show that foreign 5. Insufficient local access to finance. Only a investment is instrumental to facilitate such a struc- fraction of surveyed companies got loans from tural transformation and to maintain sustained and Ethiopian Banks over the course of the past year. broad-based economic development A number of firms, especially small and medium This study recommends five main areas for enterprises (SMEs), suggest that they did not even policy adjustments to facilitate foreign investors try to get loans because they felt it is impossible coming into Ethiopia: to get approval for them. Others claim that they  Adjust customs clearance procedures and trade do not need extra funding locally. regulations. 6. Government regulation affects business effi-  Facilitate currency convertibility and increase ciency. Companies of all ownership and industry transparency of the exchange rate policy. types spend a significant portion of senior man-  Improve tax administration consistency and agement time on government relations. More than efficacy. one-third of senior management time in Chinese  Execute impartial labor regulation. Ethiopian joint ventures is spent on these activi-  Increase the supply and quality of skilled ties; strikingly, Chinese state-owned enterprises workers. 1 Background E thiopia has experienced strong and gen- 2004 and 2010, somewhat contrasted by 3.9 percent erally broad-based real economic growth of GDP in China (1991–2010) and 5.7 percent in of around 10.6 percent on average since Vietnam (2000–2010). 2004. Growth over the last nine years was far beyond FDI is not only important to sustain high the growth rates recorded in aggregate terms for Sub- investment rates, but also essential for knowledge Saharan Africa (SSA), which only reached 5.2 percent and technology transfer. A review, for the purpose on average, less than half of Ethiopia’s average real of this report, of the incentive packages and condi- GDP growth rate during that period. Inspired by tions of several East Asian countries in attracting FDI East Asian experiences, growth was induced through (in the 1970s/80s: Singapore, Malaysia, Indonesia a mix of factors including agricultural modernization, and Thailand; and in 1990s/00s: Cambodia and the development of new export sectors, strong global Vietnam) brings to light some of the essential suc- commodity demand, and government-led develop- cess factors in FDI promotion. In general, all these ment investments. The initial double digits growth economies show commonality in the way they gradu- rates have now manifested slightly lower but remain ally embraced policies more favorable to FDI during at high single-digit levels.1 a strategic, government-led transition process away Foreign Investment in Ethiopia and Figure 1: FDI in Percent of GDP in Selected Experiences from other Countries Countries, Average per Year 6% Experiences from East Asian countries also show 5.7% that growth cannot be sustained without techno- 5% 4.5% 3.9% logical and industrial upgrading and structural 4% transformation of the country’s economic activi- 3% ties. Attracting Foreign Direct Investment (FDI) is 2.0% 2% generally seen as an integral part of the development 1% policy mix of successful emerging economies that leads the way to the required sustained economic 0% Ethiopia China Vietnam South East Asia* transformation. But looking at the FDI levels (in (2004–2010) (1991–2010) (2000–2010) (1981–2000) percent of GDP) currently observed in Ethiopia and Source: World Bank staff own calculations, based on World Develop- in comparison to the successful East Asian countries, ment Indicators (WDI). Notes: Time definition: GDP per capita growth exceeding 5 percent per year. it is clear that there is an opportunity to improve the * Indonesia, Singapore, Malaysia, and Thailand promotion of incoming foreign investment. Figure 1 shows that FDI as percentage of GDP in Ethiopia has 1 Please see World Bank (2012) for a full assessment of Ethiopia’s macro- been at a relatively low level of 2.0 percent between economy since 2004. 2 Chinese FDI in Ethiopia from import-institution to export-orientation. This regional economic areas. For instance, Singh led to substantial gains in access to foreign capital and Jun (1995) conclude in their analysis that and international markets. In addition, resulting FDI export orientation of a country is instrumental inflows supported the industrialization efforts in these to attract FDI; openness was also identified as a countries and introduced then modern production driving force of FDI in the analysis of Gastanaga technologies and managerial expertise into the econo- et al. (1998). A specific example for the role of mies. Though the strategies of the countries analyzed tax rates is Singapore again, where tax incentives vary significantly in the details, there is a set of three (tax holidays) were used to encourage foreign factors that drove FDI inflows in the past:2 investment in the 1980s and 90s. At that time, 1. Political stability is the corner stone of a favor- the corporate tax rate was decreased from 40 to able business environment to attract FDI. For 33 percent in 1987 and to 31 percent in 1990; instance, Singapore received 45 percent of the FDI likewise the personal income tax was lowered from inflows into the Association of Southeast Asian 40 to 33 percent in 1987, followed with a special Nations (ASEAN) countries between 1990 and incentive to encourage Research and Develop- 2009 (Figure 2). This period coincides with very ment (R&D) in 1990 (an additional 20 percent strong political stability and policy coherence, of tax amounts could be saved by enterprises as which was in stark contrast to many of its ASEAN a reward for increased R&D activities). Over the neighbors; and in fact, most of the other relatively same period, Thailand also used similar tax incen- less successful countries adopted incentive policies tives to promote FDI inflows and encourage the similar to those in Singapore, but in more volatile transfer of technology. and unpredictable policy environments. 3. Infrastructure plays a critical role to attract 2. Openness to trade (export orientation), labor FDI, especially in the manufacturing sector. cost, and tax rates can strongly influence the Meanwhile, FDI also helps to improve the location decisions of foreign investors within infrastructure of host countries. Cambodia benefited from improved infrastructure condi- tions to attract FDI early on in its development efforts in the 1980s, which in turn also led to Figure 2: The Share of FDI in ASEAN Countries, 1990 to 2009 more improvements of infrastructure through the increasing FDI. Realizing the time requirement 9% Indonesia to improve infrastructure all over the country, 14% Malaysia Cambodia adopted a pragmatic approach that started with the establishment of “Exports-Pro- 45% Singapore cessing Zones;� these zones are equipped with 5% relatively good infrastructure in a confined area. Philippines 17% Thailand 2 The review of past experiences also shows the importance of stable and 2% 8% favorable macroeconomic conditions as a supporting factor to attract Others Vietnam incoming FDI. Countries in East Asia have used a mix of traditional and non-traditional instruments to achieve this. For instance, overall Source: World Development Indicators (WDI), as reported in Thom- monetary and fiscal policies, sometime reinforced by wage and price son et al (2011). controls probably have had direct and indirect effects on FDI flows. Note: ASEAN was established on August 8, 1967 in Bangkok, Thai- Other supporting instruments to promote FDI that were used in the land, with the signing of the ASEAN Declaration (“Bangkok Declara- past include Equity-Debt swap programs, guarantees for investors tion�). The founding members are: Indonesia, Malaysia, Philippines, against political risks, access to finance for investors, and dispute Singapore and Thailand. settlement services. Background 3 And in fact, over time, the zones became the Chinese FDI in Ethiopia: Opportunities center of Cambodia’s garment-exporting compa- and Challenges nies. China’s experiences with “Special Economic Zones,� especially in the 1990s, followed a similar China’s economic cooperation with Ethiopia has successful approach. Ethiopia is attempting to expanded rapidly over the past decade.3 In 2011, set-up economic zones to attract more FDI and China was both the largest import and largest improve infrastructure. export trading partner of Ethiopia. Similarly, China’s investment to Ethiopia has increased steadily. Accord- A Good Time for Ethiopia to Attract ing to China’s Ministry of Commerce (Figure 3), FDI FDI Inflows and Integrate into Global from China to Ethiopia increased from virtually zero Production Chains in 2004 to an annual amount of US$58.5 million in 2010 (US$74 million in 2009). Behind the figure is The starting process of a global industrial redistri- a growing and vibrant Chinese business community bution is providing an opportunity for Ethiopia represented by the Chinese Chamber of Commerce in to attract FDI and upgrade its economic structure Addis Ababa. According to the Ethiopian Ministry of by shifting the productivity from East Asian coun- Industry, 372 Chinese investors (not including those tries to Ethiopia. Although East Asian countries have from the services sector) officially registered as of May been important FDI host countries over the past three 2012. On the other hand, business statistics from the decades, some of them are slowly losing their competi- Chinese Embassy in Addis Ababa indicates that 86 tive advantage due to increasing costs of land, stricter Chinese invested enterprises were in operation as of regulatory compliance, and increasing cost of labor. A 2011 (including service sector enterprises such as 11 recent World Bank study showed, for instance, that restaurants and four clinics). The difference between China’s coastal export manufacturing centers are faced the two sets of statistics may reflect the fact that com- with eroding cost advantages (World Bank, 2012a). panies which stop operation in Ethiopia do not ‘de- Ethiopia has the potential to step in – but there is list’ from the registry in the Ministry of Industry, and strong competition from within lower income coun- therefore market exits are most likely not accurately tries in Asia and other parts of the world, including captured in Ethiopian statistics on foreign invested Africa – and promote itself as a an alternative hub for enterprises in China. global companies to find new and favorable produc- The expansion of ties between the two countries tion centers with a clear cost advantage and a stable reflects the structural change happening in both economic outlook. Ethiopia’s cheap and abundant the Chinese and the Ethiopian economies. China labor, privileged access to high-income markets, and has stunned the world with its growth miracle, driven growing domestic and regional markets add to its by labor-intensive produce exports during the past attraction as a FDI host country. three decades. However, economic success brings with It indeed seems a good time for Ethiopia to it rising labor costs across all segments of the labor develop specific and targeted sets of policies to market, thereby eroding competitiveness in low skill, attract FDI, based on a clear understanding of the labor intensive production in China; this can only be current conditions for FDI in Ethiopia and the main constraints in way of living up to the poten- 3 Geda and Meskel (2010) argue that FDI flows, trade flows, aid flows, tial. Box 1 provides some initial insights on FDI poli- and governance practices are the four primary channels of economic cies in Ethiopia compared to China, one of the most cooperation between China and Ethiopia. Among the four, FDI stands out in terms of economic impact due to its long-term impact on the successful countries in the world in attracting FDI, country through market-based technology transfer and integrative power which can help to frame the discussion on policies. into the global production networks. 4 Chinese FDI in Ethiopia Box 1: FDI policies in Ethiopia and China Table 1 compares the FDI policies of the 1990s in China with It is to be expected, however, that an opening up of various the current policies in Ethiopia. FDI policies in China had a sectors could come about once the ongoing WTO accession largely decentralized character that allowed local authorities to negotiations of Ethiopia are finalized. attract foreign investors through localized incentives. While this Based on policies observed in China in the 1990s, there is partly also the case in Ethiopia, where regional governments are a series of “quick-wins� that could be used to increase can provide variations in local incentive packages such as in the potential for FDI inflows into Ethiopia. These could entail: the area of land access, the general FDI regime seems to be decentralizing the approval authority of small-scale FDI more centralized in nature. This is a difference by design due projects to the provincial level; introducing more discretionary to the rather low capacity of regional governments; in fact, power for local levels to negotiate the terms and incentives; according to the federal government, regional states requested providing more longer-term incentives such as favorable the federal level to administer FDI issues to overcome those taxation in special economic zones (SEZs), which currently capacity constraints. Another difference is the openness of is time bound; encouraging more joint-ventures to happen the economy as such. In China in the 1990s, geographical between SOEs and foreign investment enterprises (FIEs) to and sectoral restrictions had been largely eliminated, while enhance technological transfer; and to broaden the FDI base in Ethiopia 25 sectors are still closed for foreign investments. by opening-up more sectors. Table 1: A Comparison of Chinese and Ethiopian FDI Regulation China in 1990s Ethiopia now Motivation and driver for the • Private sector constrained by credits • Low savings rates in the economy at large government to attract more FDI • Technology transfer • Technology transfer • Focus on strategic industries • Focus on strategic industries Enforcement of FDI regulations • Decentralized FDI approval framework • Rather centralized FDI approval frame- • Discretional administrative framework, work such as favorable taxation in SEZs • Rather centralized administration of incen- tives, which are largely time bound (e.g. two-year tax holidays) • Varying regional incentives possible, for instance about land Benefits for FIEs • Encourage joint-ventures (JVs) between • Lower capital requirement for JVs, but JVs SOEs and FIEs barely happen between SOEs and FIEs • Removable of geographic and sectoral • 25 sectors are still closed for foreign restrictions on the FDI activities investors • Improved private property rights • Guarantee against expropriation protection Source: World Bank staff compilation, based on Huang 1998, and EthioInvest 2012. A similar analysis was published in World Bank (2012). countered by initiating appropriate structural change step into this opportunity with both its huge popula- that facilitates innovation and has the power to propel tion and low labor costs. China to the top of the technological frontier in some The economic cooperation between the two areas (World Bank, 2012b). Lin (2011) estimates that countries has also been facilitated by the strong China’s graduation from low-skilled manufacturing political support from both governments. Based jobs will free up nearly 100 million jobs, more than on the close political cooperation of both countries, double the number of manufacturing employment in it appears that China is now looking to anchor its low-income countries. Ethiopia needs to get ready to African investment in Ethiopia; this would also allow Background 5 Figure 3: Direct Investment from China to counterparts (Gebre-Edziabher, 2006) and tend to Ethiopia, 2004 to 2010 hire Chinese contract labor rather than local workers 80 (Alden, 2005; and Brautigam, 2009); such practices 74.3 70 would prevent the necessary technological transfer 60 and prevent economic engagement to trickle down 58.5 to the broader public. And indeed, Brautigam and 50 Tang (2011) examined all Chinese Special Economic 40 Zones (SEZs) in Africa and concluded that “inad- 30 24.0 equate local learning and local participation could 20 13.3 affect the ability of the zones to catalyze African 10 0.4 4.9 9.7 industrialization.� This survey of Chinese invested 0 enterprises in Ethiopia tries, among other things, to 2004 2005 2006 2007 2008 2009 2010 shed some light on the benefits of Chinese invest- Annual Chinese FDI into Ethiopia (US$ million) ment in Ethiopia. Source: FDI Bulletin of the Chinese Ministry of Commerce: ODI Statistics (2010). Previous Research on Chinese FDI into Note: The statistics underlying the figure are based on official reporting in China and seem to understate the true investment volume of Chinese Africa enterprises in Ethiopia. According to official statistics in China, the stock of FDI from China to Ethiopia in 2010 was US$368 million. Crosschecks with the results of the survey used for this report indicate a total Chinese Over recent years, there were many studies published FDI stock of US$403 million in 2010. The deviation likely comes from about China’s economic enegagement in Ethiopia the fact that the survey covers both large and small firms with the latter less likely to be registered in China. (cf. Adem, 2012; and Brautigam, 2009), but only a few focused specifically on FDI. For instance, Desta (2009) conducted four China-Ethiopia investment case studies, emphasizing, among other things, their China to access the expanding supply of commodi- impact on human resources, management, exports, ties in Ethiopia once the scale of the production has technology transfer, and the environment. The focus increased (which is planned). On the other hand, on the specific issue of human resources concludes for the Ethiopian government is very keen on looking this area that “given the Chinese investors in Ethiopia for insights from the East Asian development model are unfamiliar with cultural makeup of the local situa- and expects to learn much from China’s experience tion and the Ethiopian labor laws, Ethiopian employ- over the past three decades (as much as Korea’s) to ees seemed to be in charge of the human resources further its own economic development. management in these companies.� Since the study is Opportunities come with challenges: Together largely based on anecdotes, it is difficult to generalize with capital investment and technology transfer, its conclusions. Chinese interest into Ethiopia has also brought Other research by Geda and Meskel (2010) con- about controversies to the local community. Not ducted general surveys among 33 Chinese firms, 50 surprisingly there are segments in the Ethiopian local producers, and 20 consumers of Chinese products. society—with vested interests—that are expressing The surveys focused on qualitative questions about the anxiety given the sheer intensity of bilateral rela- investment characteristics and business operations of tions (Adem, 2012). Some other more specific issues firms, e.g. on the investment size, sources of supplies, that came up over the recent past vis-à-vis Chinese perceived major constraints for investment in Ethiopia. investment is the perception that Chinese compa- The survey also reached out to local producers about the nies seldom engage in joint ventures with Ethiopian competitive impact and technological transfer coming 6 Chinese FDI in Ethiopia with the Chinese engagement. Given the qualitative Chinese investment and recommended more policy and descriptive focus of the surveys the authors found support from the Ethiopian government toward Chi- it difficult to draw appropriate, more general policy nese FDI. The World Bank Survey on Chinese FDI in conclusions. Yet, the research found that the technol- Ethiopia tries to close some of the existing knowledge ogy and management skills transfers are significant in gap based on a more robust and coherent dataset. Methodology and objective of the survey 2 on Chinese FDI in Ethiopia I n order to systematically understand Chinese be in operation). Nineteen firms submitted responses investors’ experience in Ethiopia and to draw through end of May, which were subsequently veri- lessons to facilitate future foreign business invest- fied via telephone. To follow up on this process, the ments in the country, the Ethiopian Government survey team conducted face-to-face interviews with requested the World Bank to carry out a survey on 52 firms between May 28 and June 5. The result Chinese enterprises in Ethiopia in early 2012. Because was the generation of a dataset with inputs from 71 the Ethiopian Government is eager to foster relation- companies. Due to data quality issues, surveys from ships with China and to learn lessons from China’s two firms had to be removed from the final sample, successful economic development path over the past making the dataset underlying this analysis a total of three decades, policy advice drawn from this survey 69 companies with a response rate to the survey of 80 was expected to be of a practical nature, focusing on percent (69 out of 86). quick-win areas, and to facilitate further exchange The survey covers various aspects of the invest- between the Ethiopian Government and the Chinese ment climate in Ethiopia, and includes categories such business community in Ethiopia. The survey specifi- as basic information about enterprises, infrastructure, cally targets Chinese FDI and therefore goes beyond sales and supplies, land, crime, competition, finance, traditional World Bank surveys and instruments such human resources, motivation, and constraints. as the Doing Business (DB) and Investment Climate Eighty-five percent of the survey questions are based Assessment (ICA). on ICA investment climate questions and thus the A 95-question survey was designed and distrib- results can be compared to other country experiences uted among Chinese enterprises. With support of to deepen the analysis. Some specific questions were the Chinese Chamber of Commerce in Ethiopia, the also added and modified to reflect the context of survey was sent—both online and as hard copy—to Ethiopia. The survey was translated and administered 86 Chinese enterprises in Ethiopia in early May 2012 into Chinese in order to adapt to the language needs (to all companies known to the Chinese Embassy to of respondents. Setting the stage 3 Main findings from the General Ethiopia Enterprise Survey4 T he most recent Enterprise Survey for Ethiopia other hand, customs and trade regulation rank as the (2011/12) shows that only four percent of third biggest obstacle for large firms, whereas high tax the sampled firms in Ethiopia are private and rates constrain the majority of small firms followed by foreign-owned, a proportion much lower than that in finance and land access. Sub-Saharan Africa (14.7 percent). The average per- Firms in Ethiopia rely heavily on internal financ- centage of all worldwide sampled private enterprises is ing for investments. Of surveyed firms, 86.3 percent 9.7 percent. This finding indicates that the potential use internal finance for their investment (Figure 5), exists for Ethiopia to catch up with other countries a proportion much higher than that in Sub-Saharan and increase the number of privately owned foreign Africa (SSA, 79.3 percent) and the worldwide average companies that will contribute to the development of (68.6 percent). On the other hand, while Ethiopian the domestic market and economy. firms are less likely to use bank financing than those One third of sampled firms say that access to in SSA countries, Ethiopian firms do outperform in finance is the biggest obstacle for doing business financing through stock issuance. In addition, only 0.7 in Ethiopia. Second and third on the list of obstacles percent of surveyed firms in Ethiopia report financing are access to land and access to electricity (Figure 4). of working capital with supplier credits; this propor- Firms of different sizes rank business obstacles differ- tion lags considerably behind the percentage in SSA ently. While small and medium firms are more likely (12.2 percent) and the world average of 11.8 percent. to be constrained by the lack of access to finance The absence of supplier credits may indicate the weak and land, large firms have found electricity the big- state of the supply chain at large in Ethiopia. gest disturbance to their business operations. On the Infrastructure obstacles, especially electricity, mostly refer to the long wait times to actually be connected to the desired services. Although surveyed Figure 4: Top 10 Business Environment firms named electricity as the third biggest obstacle, Constraints the comparison with SSA and the world average indi- Access to finance cates that Ethiopian firms actually experience fewer 33.2 Access to land 22.9 Electricity 12.2 Tax administration 4 Enterprise Survey is a service of the World Bank that administers surveys 7.1 worldwide on the firm-level of a representative sample of an economy’s Tax rates 7 private sector. The most recent Enterprise Survey for Ethiopia was carried Customs and trade regulations 5.2 out in 2011/12, and the results have just been published. The surveys cover Practices of the informal sector 4.5 a broad range of business environment topics including access to finance, Corruption 2.7 corruption, infrastructure, crime, competition, and performance measures. The World Bank has collected this data from face-to-face interviews with Transportation 2.2 top managers and business owners in over 130,000 companies in 135 Inadequately educated workforce 1.8 economies. Findings and recommendations are helping policymakers 0 5 10 15 20 25 30 35 identify, prioritize, and implement reforms of policies and institutions that support efficient private economic activity. For more information, please Source: World Bank, Ethiopia Enterprise Survey (2011). consult the website at: http://www.enterprisesurveys.org. 10 Chinese FDI in Ethiopia Figure 5: Enterprise Financing Sources for clear exports/imports through customs is 15.8/25.1 Investment days in Ethiopia (Figure 7), about twice long as the custom clearance time in SSA (7.9/13.8 days) and the Ethiopia 86.3 8.2 4.8 13.6 worldwide level (7.2/11.4 days). Due to the recent change of custom clearance policies, time spent on SSA 79.3 9.9 2 19.9 custom clearance for Ethiopian firms seem to have further expanded over recent months (this will be World 68.6 17 4.5 29.9 discussed in detail in later chapters). 0% 20% 40% 60% 80% 100% Efforts to cut down on bureaucracy and rent- Internal Finance (%) Bank Finance (%) seeking in Ethiopia are bearing fruits. Senior man- Trade Credit Financing (%) Equity, Sales of Stock (%) agers in Ethiopia spend about half the time of those Other Financing (%) in SSA countries in dealing with the requirements of Source: World Bank, Ethiopia Enterprise Survey (2011). government regulation (Figure 8). On average, to deal with Ethiopian regulations requires 1.3 meetings per year per firm for tax issues, compared with 2.7 meet- number of power outages. Accordingly, the value ings required in the SSA countries. loss due to power outrages is also lower in Ethiopia (Figure 6). However, firms in Ethiopia expect to wait for 111.8 days to be connected to the electricity net- Figure 7: Custom Efficiency work after their submission of service application, 30 25.1 nearly three times longer than the waiting time in SSA 25 (33.0 days) and the world average (33.9 days). Simi- 20 15.8 13.8 15 11.4 lar longer delays in obtaining water connections and 10 7.9 7.2 mainline telephone connections are also significant 5 problems for doing business in Ethiopia. 0 Ethiopia SSA World Customs and trade regulation are another big Average Time to Clear Direct Exports Through Customs (days) constraint for Ethiopian businesses, especially Average Time to Clear Imports from Customs (days) those frequently engaging in international trade. The Enterprise Survey finds that the average time to Source: World Bank, Ethiopia Enterprise Survey (2011). Figure 8: Regulation Burden Figure 6: Electricity Provision and Service 10 3.0 Delays 9 9.1 2.7 2.5 10 8 7.5 120 111.8 2 8.9 7 2.0 8 100 6 7 80 5 1.5 1.3 6 5.6 4 60 3 1.0 3 4 40 33 33.9 2 0.5 2 1 20 0 0.0 0 0 Ethiopia SSA World Ethiopia SSA World Ethiopia SSA World Ethiopia SSA World Senior Management Time Spent in Number of Visits or Required Number of Power Delay in Obtaining an Dealing with Requirements of Meetings with Tax Officials Outrages in a Month Electrical Connection Government Regulation (%) Source: World Bank, Ethiopia Enterprise Survey (2011). Source: World Bank Ethiopia Enterprise Survey (2011). Stylized facts 4 The Footprint of Chinese Invested Enterprises in Ethiopia Investment Volume Figure 9: Ownership types of Chinese firms in Ethiopia The Chinese FDI survey captures Chinese invest- 3% Others 13% ment in Ethiopia totaling ETB 7.5 billion (US$450 Chinese state-owned million). Comparing this figure with the officially 69% reported figures of Chinese enterprises to the Chinese Chinese private Ministry of Commerce in Figure 3 shows, on the one hand, that the official Chinese figures are understat- 15% Chinese-Ethiopian ing the true size of Chinese investment by about 10 private joint-venture percent; but on the other hand, it indicates that the Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). survey really is capturing the brunt of Chinese invest- ment in Ethiopia, an important fact for the relevance of the policy conclusions at the end of this report. A which are typically in the construction and transpor- simple average of the investment by the number of tation business and subsidiaries to state-owned com- firms indicates an average investment size of ETB 122 panies back in China assigned for overseas business. million or US$7 million per company. The distribu- tion of the firm scales is shown in Table 2. Sector Focus of Chinese investment Ownership Types Among the surveyed companies, 13 are construc- tion and transportation firms, 45 are manufactur- The majority of Chinese enterprises in Ethiopia ing, and 11 are in the service industries (Figure 10, are privately owned (69 percent). Nine companies first pie chart). Excluding the 13 construction firms, are private joint ventures with an Ethiopian partner the 56 so-called “investments firms� consist of com- (Figure 9). Among these joint venture companies, panies in textile manufacturing, garments/shoe Chinese owners usually have a larger share, ranging manufacturing, non-metallic minerals, machinery from 60 to 80 percent of the company ownership. 13 and equipment supplies, information technology, percent of the surveyed companies are state-owned, electronics, food (restaurants), and other manufactur- ing (Figure 10, second pie chart). Chinese investors, Table 2: Investment Volumes of Chinese similar to any other investor, usually try to maximize Firms: Distribution on their comparative advantage when selecting the Min 75% 50% 25% 5% Max entry industry in Ethiopia; two main determinants of such considerations are management expertise in the 1 Million >3.5 >15 >50 >472.5 2 billion million million million million industry and the parent company’s price and technol- Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). ogy advantages. 12 Chinese FDI in Ethiopia Figure 10: Sectoral Distribution of Chinese Table 3: Numbers of Ethiopian Employees in Invested Enterprises in Ethiopia Chinese Invested Enterprises 3 main sectors Ethiopian employees 2008 2011 (number of firms, 69 in total) Total full-time and permanent 13,632 15,910 11 Services Average (by company) full-time and 368 257 permanent 45 Total seasonal or temporary NA 7,813 Manufacturing Number of firms reported 37 61 13 Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). Construction Table 4: Number of Companies Surveyed: Sub-sectors in manufacturing and services (56 firms in total) Distribution by Firm Size 2% Employment Size # of companies 5% 5% Electronics Food Textile 4% Small Size >=5 and <=19 15 4% Garments Medium Size =20 and <=99 30 Retail 4% Information Technology Large Size >=100 24 16% 9% Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). Other services Machinery & equipment 46% 5% Other manufacturing Non-metallic minerals The average monthly salary for Ethiopian Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). employees hired by Chinese firms is ETB 1,445 (US$85). This is above earnings seen in domestic companies and businesses. Unofficial estimates show Employment, Salaries, and Training that the average monthly salary in Ethiopia is about US$75 (in Zambia, as a comparison, estimates are By the end of 2011, Chinese companies employed about US$133). For instance, in Addis Ababa, 18,368 permanent, full-time employees from unskilled workers in Government and state-owned both China and Ethiopia. The employment size has companies earn from ETB 300 (cleaner) to ETB increased by 19 percent since the end of 2008. Among 950 (security); skilled workers earn from ETB 1,114 the full-time permanent employees, 15,910 are Ethio- and up. pians (Table 3). In addition, Chinese firms also hired Sixty-nine percent of the surveyed Chinese 7,813 seasonal or temporary workers in 2011. companies provide formal training programs for The majority of companies are of medium Ethiopian workers, whereas only 38 percent of or large size, i.e. they employ at least 20 workers domestic firms would invest in such programs.5 The (Table 4). Twenty-four companies out of 69 employ survey shows that 11,314 Ethiopian benefited from even more than 100 employees, with eight of them training programs provided by Chinese firms. employing more than 500 workers. Of these largest companies, not surprisingly, five of eight are in the construction and transportation business; two of eight are manufacturing companies and one is in the 5 This is according to data of the International Finance Corporation’s information technology industry (Table 4). Enterprise Surveys of 2006. Stylized facts 13 Trade Activities: Import and Exports industry are simply not available in the local market, probably due to the low capacity of local producers. The production processes of Chinese firms in Thus, some companies, such as automobile compa- Ethiopia heavily rely on imported supplies and nies, have to import a significant amount of their spare materials. In 2011, 91.5 percent of the surveyed com- parts to service their customers. panies needed to import materials and supplies, and Increasingly, firms are coming to Ethiopia to 61 percent of their total material inputs and supplies produce for export. According to the survey, seven were from foreign origins. Therefore, customs and manufacturing companies and one service company trade regulations, transportation policy, and foreign are exporting or planning to export products and exchange rate policies have a strong impact on the services (e.g. automobile parts, leather, bone china, productivity and profitability of the companies. shoes). And this does not only refer to exports to Interviews showed the main reasons for the China. In fact, there seems a trend starting to export high import content of Chinese invested firms to developed markets, such as the US and EU. Dur- are in the underdeveloped supply chain systems ing the past two years, six new Chinese firms came in Ethiopia. This makes it very costly for investors to Ethiopia to produce for that purpose. Many of to buy supplies locally. As a result, Chinese invested these new entrants for export production (so called enterprises often look for substitutes from abroad. For efficiency-seeking FDI) are large-scale companies with example, a tire in China is sold for CNY 300, or about a long history and good exposure to the global mar- ETB 900. In Ethiopia, a tire is sold for ETB 3,000, ket, such as a shoe factory from Guangdong (Box 3), which is much higher than a tire that is imported which started operation in Ethiopia in late 2011. The from China even considering the transportation and current largest exporter is in the leather industry, and customs clearance costs. On the other hand, some 100 percent of its products were exported in 2011 standard parts, for instance, used in the automobile with a total value of ETB 250 million. FDI motivation analysis 5 What attracts Chinese firms to invest in Ethiopia?6 I n order to understand the main drivers of Chi- Ethiopian economy; this includes the limited mar- nese investment in Ethiopia, the survey tested 20 ket capacity and market competition, cheap labor, potential motivations to set business in Ethiopia. cheap land, and an expanding Ethiopian market. The Figure 11 provides the details of all 20 motivations surveyed firms claim that increasing competition, tested. The darker the area is, the more respondents intensified trade competition, rising labor costs, and agreed with the statements. currency appreciation in China have made it more and more difficult to do business in the Chinese Four Principle Drivers market over the past years. At the same time, the production capacity in Ethiopia is still low, and the There are four principal drivers of Chinese FDI in local market is rapidly expanding, making the market Ethiopia. First, to take advantage of a good under- there look very attractive for Chinese investors. In standing of the investment climate gained from the manufacturing and service sector, cheap labor entrepreneurs’ social networks. The survey finds that in Ethiopia is especially appealing. However, enter- the social networks of Chinese investors function as a ing the market seems to be a sobering experience significant factor in making their investment decision to many investors since most firms state that they in favor of Ethiopia. In fact it is striking to hear in the are less optimistic about the perceived advantages interviews that information about potential investment and opportunities after entering the market. One opportunities barely travels through formal channels, important example is the realization that indeed local such as through the investment promotion agency or labor is cheaper than back in China and elsewhere, other government agencies. In contrast, most Chinese but labor productivity is also very low due to inad- investors get to know about the Ethiopian business equate education. environment through their personal connections with Third, to maximize cross-border investment people who have already been doing business there. incentives provided by the Ethiopian and Chinese This is manifested from the fact that managers/owners governments. During the last decade, the Ethiopian of more than 80 percent of surveyed firms are origi- government has continuously provided FDI incen- nally from only three Chinese Provinces, i.e. Liaoning, tives, such as tax holidays and tariff free policy for FDI Zhejiang, and Fujian. Many know each other through equipment imports. On the other hand, the Chinese business cooperation back in China or elsewhere and government has also adopted the “China Goes Global before they came to Ethiopia. Some others are relatives Policy,� which awards Chinese firms investing abroad or family friends. Relying on personal accounts to make with tax credits in China. These incentives have proved investment decisions seems particularly important in to be a large motivation for Chinese firms’ investment the service sector, such as the restaurant business. Second, to take advantage of the perceived 6 See also Annex 2: Selected breakdown of motives of Chinese invest- opportunities provided by the current state of the ment into Ethiopia. 16 Chinese FDI in Ethiopia Figure 11: Summary Overview of Motives to Invest in Ethiopia Construction Manufacturing Service 1. Good understanding of investment climate (from social network) 2. To take advantage of lacking capacity and competition in Ethiopia 3. Similar business environment and government regulation 4. To take advantage of cheaper labor in Ethiopia 5. Incoming investment incentives from Ethiopian government 6. Outgoing investment incentives from Chinese government 7. To enter the local market in Ethiopia 8. Better business environment in Ethiopia than in China 9. To take advantage of cheaper land in Ethiopia 10. Lower tax rates 11. To take advantage of skilled labor in Ethiopia 12. Concession in land access 13. Strategic motive of parent company to invest in Africa 14. Use parent company’s advantage in cost management 15. Parent company looking for investments outside China 16. To produce for export to other African countries 17. To produce for export to the EU 18. To produce for export to the US 19. Use the parent’s special advantage in technology 20. To produce for export to China Strongly Disagree Neither agree Agree Strongly agree disagree nor disagree Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). in Ethiopia, especially for the manufacturing industry. favor of the stable political environment of Ethio- Yet some firms find that incentives are still inadequate pia. Most of the very large Chinese firms that have to help them overcome many of the doing business a parent company in China are construction firms obstacles in Ethiopia. As a result, many Chinese busi- (five of eight). The surveyed construction firms favor nesses fail and exit the country despite the incentives the political stability of Ethiopia, and perceive their they received from the both governments. presence in the country as an anchor for their business Fourth, to make a strategic move of the parent development in the East Africa region and beyond. company into the African market and to invest in Overall, survey respondents think the Ethiopian FDI motivation analysis 17 government provides a stable political environment experienced little or no obstacles in political stability for the firms to do business smoothly around the year. over the course of their engagement. Many of them Eighty-one percent of the firms from manufacturing, also claim that Ethiopia stands out among all African service, and construction industries agree that they countries in terms of continuous political stability. FDI obstacles analysis 6 Opportunities to improve Chinese investment into Ethiopia7 T he survey examined 15 potential investment constraints based on the experiences of the Box 2: Two Main problems in Customs Chinese investors in Ethiopia. Respondents and Trade Regulations indicate that customs and trade regulation, tax admin- Mismatch of tariff base value. When collecting tariffs istration, and access to finance are the three largest for imported supplies, the customs authority often does not accept the documented value from Chinese sellers. obstacles for investing in Ethiopia (Figure 12). Instead, customs usually uses an international ‘standard Obstacles faced vary by size of the companies. price’ for the imported goods to compute import tariffs Figure 13 compares the obstacles faced by small, accordingly. When collecting tariffs for imported supplies, the customs authority often does not accept the documented medium, and large companies. The figure shows that value from Chinese sellers. Instead, customs usually uses SMEs experience more challenges than large com- an international ‘standard price’ for the imported goods to panies in almost all categories. Customs and trade compute import tariffs accordingly. Since most imports come from China, where product prices are among the lowest in regulation are more likely to disrupt supply chains of the world, the value used by the customs authority can be higher by as much as twice the real value. Unpredictable and long delay of customs clearance. Figure 12: Largest Obstacles for Chinese The customs authority closes at 11 am on working days, and is Firms in Ethiopia perceived by importers as being unable to finish the customs clearance process on time. What seemed to prolong processes Customs and trade regulations 84 even further was a new policy that required that all customs Tax administration 53 clearance of imports should be done in Mojo (the rule was Access to finance 40 revised subsequently to include the option of the Addis Ababa Tax rates 35 customs terminal to keep imported goods). Before the revision Macroeconomic instability 35 of the rule, goods imported through Djibouti had to first be 32 transported to Mojo, stay there at least for two days for all Labor regulations processes and papers, then be transported from Mojo to Electricity 21 Addis Ababa. All in-land transportation services are required Inadequately educated workforce 18 to be done by Ethiopian transportation companies. Due to the Access to land 17 limited capacity of those transportation companies, a great Transportation 15 number of imports were stuck in Mojo. One company reports Corruption 11 that they stopped operating for one and a half months due Business licensing and permits 10 to delays in Mojo. Crime, theft, and disorder 6 Competitors in the informal sector 5 Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). Political instability 1 Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). small businesses (e.g. the recent rule of compulsory Note: Ranking derived from number of times mentioned by surveyed firms as the top three obstacles by firm. Calculation method applied: customs clearance in Mojo, which was revised sub- selected once as largest obstacle equals three points, selected once as sequently to include the option of the Addis Ababa second largest obstacle equals two points, and selected once as third largest obstacle equals one point. This is then added up. As a result, number of points for a specific obstacle can be higher than total number 7 See also Annex 2: Selected breakdown of possible obstacles for Chinese of enterprises surveyed, which was 69. investment into Ethiopia. 20 Chinese FDI in Ethiopia Figure 13: Obstacles and Opportunities to Figure 14: Obstacles and Opportunities to Improve: by Firm Size Improve: by Industry Small Medium Large Manufacturing Services Construction Customs and trade regulations Customs and trade regulations Macroeconomic instability Macroeconomic instability Inadequately educated workforce Inadequately educated workforce Access to financing Access to financing Labor regulations Labor regulations Tax regulation Tax regulation Tax rate Tax rate Electricity Electricity Access to land Access to land Transport Transport Crime Crime Informal competition Informal competition Business licensing Business licensing Corruption Corruption Water Water Political instability Political instability Very Major Moderate Minor No Very Major Moderate Minor No severe obstacle obstacle Obstacle obstacle severe obstacle obstacle Obstacle obstacle obstacle obstacle Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). customs terminal to keep imported goods), whereas Construction companies are highly concerned with larger companies are more concerned about transpor- taxation levels and inadequate workforce education. tation services, which are reported to be expensive, monopolized, and closed to foreign investors. Six Principle Obstacles Perceived obstacles also vary across different industries. Figure 14 compares obstacle rankings in There are six principal obstacles of Chinese invested manufacturing, services, and construction industry. It enterprises in Ethiopia. First, trade regulation and shows that customs and trade regulations are rated as a customs clearance efficiency. Due to the lack of local significant obstacle for all sectors. For manufacturing supply network, Chinese firms in Ethiopia rely heavily firms, macroeconomic instability, especially foreign on imported supplies and materials (see stylized facts exchange risks, stands out as major problem. The ser- above). But current regulations are not designed well vice sector is specifically challenged by access to land. enough to facilitate fast customs clearance of imported FDI obstacles analysis 21 materials. According to the survey, the average customs Figure 16: Investor Perceptions on Foreign clearance duration is 47 days, about twice longer than Exchange Risks that in China and Kenya, and one month longer than Percentage of firms had Percentage of firms see that in Djibouti (Figure 15). The survey shows that 32.3 significant losses due to exchange rate as a big percent of the firms named customs and trade regulation depreciation source of risk 100 100 as the biggest obstacle among all 15 factors. As a result, 91% 91% 92% 85% trade and customs regulation is the main issue imped- 80 79% 80 ing Chinese FDI in Ethiopia. Box 2 provides additional 62% 60 60 insights into customs and trade regulation issues. Second, perceived foreign exchange rate risks 40 40 deter investment. Restrictions on foreign currency 20 20 transaction and conversion, in combination with perceived uncertainty over the foreign exchange rate 0 0 path, deters new investment and discourages existing Manufacturing Services Construction Chinese invested firms to increase investments. As light manufacturing/labor intensive firms rely more Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). heavily on imported supplies, they are specifically concerned about foreign exchange risks. According to the survey, 90 percent of the firms perceive foreign inconsistency of tax law explanation and frequent law exchange rate as one of the largest risks doing business amendments. According to the survey, 71 percent of in Ethiopia, and 78 percent of the firms experienced the firms find the inconsistency of tax law explanation great losses in the past due to an unexpected deprecia- and the frequent law amendment a major obstacle to tion. Manufacturing and construction firms are more doing business. Accordingly, inconsistencies of tax concerned with foreign exchange risks than are the laws greatly impede investments in Ethiopia, as inves- service firms (Figure 16). tors do not have a clear expectation for the future cash Third, tax administration inconsistency and flows of their new projects. A good illustration is the inefficiency. Many Chinese firms claim to suffer from ongoing tax disputes of Chinese companies in Addis Ababa, which come from a lack of transparency and unpredictability of tax policies. According to the sur- Figure 15: Days Required for Customs vey respondents, the government imposed a re-inter- Clearance, Selected Countries pretation of tax rules during recent months, effectively 50 making some companies paying retroactive sales tax 47 44 45 (in the order of 30 percent) on each unit sold in past 40 37 years. Other inconsistencies are also identified. For 35 instance, regarding the lease of land, the central and 30 25 24 24 local governments often have different interpretations 20 18 of laws and rules, which cost foreign investors extra 15 time and resources to understand and follow policies 10 5 appropriately. Box 3 provides a more detailed list of 0 problems with current tax administration. Ethiopia Ethiopia SSA China Kenya Djibouti Fourth, labor education impeded productiv- (CN firms) (All firms) ity and skill transfer. Ethiopian workers hired by Source: Doing Business Report (2011); World Bank Survey, Chinese FDI in Ethiopia (May 2012). Chinese invested companies have, on average, a six 22 Chinese FDI in Ethiopia Figure 17: Average Education of Workers in Box 3: Perceived Issues in the Tax Chinese Invested Enterprises in Ethiopia Administration 40% 38% Profit Tax. Current regulation forbids firms to deduct 35% expenses such as flights of staff, advertisement, and market 30% promotion from the base for profits tax, while in fact these expenses are operation costs for businesses. The profit tax 25% 20% 20% rate is 30 percent. 20% 17% 17% 17% 15% Tax authorities. Current disputes regarding consumption 12% tax, value added tax, and profit tax are all required to be 10% 7% settled at one authority, the Customs Revenue Authority, 4% 5% 3% rather than specialized authorities. In the experience of 0% business owners, this overburdens the CRA, which seems 0–3 years 4–6 years 7–9 years 10–12 years 13 years to lack expertise in some of the areas and also has limited or more administrative capacity to settle disputes appropriately and efficiently. Chinese workers Ethiopian workers Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). Lack of access to legal receipts. It is often difficult to obtain legal receipts from local suppliers of input material, even though the suppliers are legal and formal entities. To avoid tax issues, companies then need to spend more time issue in accessing finance locally, it is unclear to what to seek other suppliers and often settle for higher prices. extent Chinese invested firms actually would want to access the local financial market for starting their Unpredictable timetable of government auditing. Tax authorities usually come for on-site auditing with last- operations in Ethiopia. minute notification. Ad-hoc visits add to the difficulty and The relatively low importance placed by Chi- costs of small business operations in Ethiopia. nese enterprises on access to finance, especially Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). compared to the finding of the Enterprise Survey presented in chapter III, could be that Chinese enterprises have access to finance in China that can be used to invest in Ethiopia. It is clear, however, to seven year education, much lower than the average that most firms have some need to locally finance education of Chinese workers. Inadequate education their working capital. Figure 18 compares selected and lack of training of Ethiopian workers, especially economies in terms of the ease of getting credit those in the manufacturing and construction sectors, through June 2011. Ethiopia lags behind China in impede management communication and skill trans- both credit legal rights index and the depth of credit fer (English is the working language in most cases). information index.8 Moreover, the Doing Business In order to fill in the gap of inadequate education of Report 2012 shows that only 0.2 percent of the indi- local workers, Chinese firms usually hire Chinese lead viduals/firms in Ethiopia are listed in a public credit workers with 10–12 years education and provided registry with information on their borrowing history on-site trainings for Ethiopian employees (Figure 17). from the past five years, which is much lower than Fifth, insufficient local access to finance. The survey shows that only three companies obtained loans from Ethiopian Banks in the past year. A number of 8 “Strength of legal rights index� measures the degree to which collateral firms, especially SMEs, suggest that they did not even and bankruptcy laws protect the rights of borrowers and lenders and try to get loans because they felt it was impossible to thus facilitate lending. “Depth of credit information index� measures rules and practices affecting the coverage, scope and accessibility of obtain approval. Others claim that they do not need credit information available through either a public credit registry or a extra funding locally. So while there probably is an private credit bureau. FDI obstacles analysis 23 Figure 18: Doing Business Index – Getting Figure 19: Senior Management Time Spent Credit on Handling Government Relations (2011) 10 By Ownership 9 Chinese & Ethiopian Private 37.5% 8 Joint Venture Company 7 Chinese Private Company 22.4% 6 5 Other 10% 4 3 Chinese State Owned 8.4% Company 2 0% 20% 40% 60% 80% 100% 1 0 By Industry Strength of credit Depth of credit legal rights index (0–10) information index (0–6) Manufacturing 25.3% Ethiopia China SSA Djibouti Egypt Kenya Services 14.8% Source: 2012 Doing Business Report. Construction & transport 13.6% 0% 20% 40% 60% 80% 100% that in China (82.5 percent) and below the average Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). of sub-Saharan level (3.5 percent). Sixth, government regulation affects business efficiency. Companies of all ownership and industry types spend a significant portion of senior manage- Despite the perceived obstacles, Ethiopia is an ment time on government relations (Figure 19, upper attractive business destination for Chinese enter- side). More than one-third of senior management time prises. According to the survey, almost half of Chinese in Chinese Ethiopian joint ventures is spent on these investors are in for the long run (10 years or more) and activities; strikingly, Chinese SOEs spend less than 10 plan to increase investment in Ethiopia over coming percent of their time, somewhat indicating a special, years (Figure 20). possibly preferential status for SOEs. Looking at indus- tries mirrors this assessment. Manufacturing companies, Figure 20: Investors’ Willingness to Stay in which are predominantly private, spend one-fourth of Ethiopia their time on government relations; construction and 49 percent of the firms see themselves 48 percent of the firms plan transport companies, which are mainly SOEs, on the staying in Ethiopia for the long run to increase investment other hand, “only� use half the time needed by manu- facturing companies (Figure 19, lower side). 19% Other findings regarding government regulation 36% show that 65 percent of surveyed Chinese companies 49% 48% 33% disagree with the sentence that “the court system is fair, 15% impartial and uncorrupted�. Likewise, 74 percent of surveyed Chinese companies disagree that “Govern- ment officials’ interpretations of the laws and regulations Don't know Will stay Will not stay affecting this company are consistent and predictable�. Source: World Bank Survey, Chinese FDI in Ethiopia (May 2012). 7 Case studies P reliminary survey findings were presented to firms have signed investment agreements with EIZ in the Government in June 2012. Representatives all targeted areas. of this small workshop requested to enrich the analysis through targeted interviews to analyze some of Challenges the specific constraints of key industries in Ethiopia. The team then had additional face-to-face interviews Being the first of its kind, EIZ has gained prefer- in the Eastern Industrial Zone to better understand the ential policies from the Ethiopian Government in situation of a company that manages and runs the first developing the industrial park; however, EIZ has also special economic zone in Ethiopia, as well as Huajian, encountered numerous challenges in financing, land a large-scale shoe manufacturer, to provide insights of ownership, and cooperation with local government. constraints in the way of exporting companies. EIZ is an interesting case study to highlight challenges for investors doing business in this area in Ethiopia. Ethiopia’s approach to Special High cost of infrastructure investment. This Economic Zones – Eastern Industrial puts a heavy financial burden on the Industrial Park Zone (EIZ)9 investor and in fact questions the overall business model. A major cost of EIZ consists of investment Eastern Industry Zone (EIZ) is a Special Economic in basic infrastructure for factory buildings as well Zone (SEZ) or Industrial Park in Ethiopia, located as financial cost. Basic infrastructure refers to roads, 37 km northwest to Addis Ababa, 900 km to the electricity, water, communication, and drainage port of Djibouti and with 200 hectares of land in facilities in the industrial park. The EIZ estimates its Dukem—the first of its kind through an invest- cost is one and a half times higher than the cost of ment from China.10 In 2007, Yonggang Group and a similar investment in China, due to higher cost in Qiyuan Group—two Chinese private steel firms from construction materials, construction itself, and trade Zhangjiagang City—won the bid of Chinese Minis- logistics. Moreover, in China, the local government try of Commerce’s calling for a tender in November shares 50 percent to 70 percent of the cost for basic 2007. For Ethiopia, EIZ is the first and largest-scale infrastructure, which provides a very strong incen- industrial park of the nation, and the Ethiopian Gov- tive for investors in China. To date, EIZ has invested ernment has prioritized this project in their “Sustain- US$80 million in the development. This investment able Development and Poverty Reduction Program� is made up of a mix of common basic infrastructure to promote its industrial sector development. The Ministry of Industry of Ethiopia requires the EIZ to focus on Chinese companies in the area of textile, 9 World Bank Survey, Chinese FDI in Ethiopia (May 2012); and inter- view with Eastern Industry Zone. apparel, building materials, mechanical manufactur- 10 This project is one of the 50 zones planned globally under China’s ing, and agricultural processing. Currently, 11 Chinese “Going Out Policy�. 26 Chinese FDI in Ethiopia investment and investment specific for individual ten- While this is welcome, it obviously does not impact ants of the zone. The latter comes from the fact that EIZ itself. Third, the Government is setting up a EIZ needs to solely shoulder infrastructure cost for bonded warehouse to facilitate customs clearance. each individual company wanting to use the EIZ as a Fourth, EIZ was promised sufficient and uninter- tenant (not only to connect to basic infrastructure but rupted electricity supply. Finally, a specific concern also for building cost). Such costs vary depending on is the particularly low efficiency of local government. the tenant’s business and company size. For this case Being the first of its kind, both EIZ and the Ethiopian study, the assumption is that costs for a tenant are in Government had to meet numerous new challenges. the order of ETB 86 million (around US$5 million). However, low efficiency in resolving problems as well Limited sources of revenue. Large investments as lack of coordination among different government are only partly covered by revenues. Despite pref- agencies across all levels has resulted in even higher erential policies from both Chinese and Ethiopian transaction cost. governments, EIZ has deep concerns over the limited possibilities in revenue generation, thereby question- Policy implications ing the sustainability of its own business model, if not the overall current approach to the set-up of SEZs in Matching cost and revenues are the main concern of Ethiopia. Currently, there are three major revenue EIZ. Given the special characteristics and nature of sources for EIZ: i) leasing fees of land and factory an Economic Special Zone (ESZ), the government buildings; ii) maintenance and property management and the investor need to find a sustainable model of fees; and iii) a subsidy from the Chinese government. cooperation that caters to both interests. Since SEZs Given the early stage of its operation, EIZ mainly are being implemented across many countries in the relies on the first revenue source, i.e. leasing fees for world, it is of particular importance to look for other land and factory buildings. However, in order to country experiences to ensure lessons learnt elsewhere. attract Chinese investors, EIZ needs to provide deeply China could be one of those countries, where SEZs are discounted leasing fees. This means that the revenue often run and/or subsidized by Government entities; per year generated—for the above mentioned ten- so could be Cambodia, where SEZ are predominantly ant—would be around ETB 8.8 million, which is run by private entities. Korea also has a long-standing around 10 percent of EIZ’s infrastructure cost for this history of SEZs, which started in the 1970s and 80s tenant. EIZ estimates that it will take 15 years for EIZ (for insights on Korea, see World Bank, 2012). to generate its first profit, based on these parameters. Global lessons underline that there are a number of necessary, albeit not sufficient, conditions required Perceived lack of support for SEZs to be successful (World Bank, 2011). To attract and retain investment, a combination of fac- While the Ethiopian Government has enacted a series tors needs to come together, including: of policy incentives to help EIZ and to attract more i. Formulation of appropriate SEZ legal and Chinese companies to the zone, the measures are regulatory framework: This would include hardly targeted enough to help the specific problems designing of a flexible, dynamic and multi-use of operating the zone. First, EIZ enjoys a tax free national framework, complemented with smart/ period of seven years, which started in 2007 (though performance based incentives for a sustainable EIZ apparently does not have any taxable income SEZ policy; anyway). Second, each Chinese firm that opens its production line in EIZ enjoys a two-year free VAT 11 World Bank Survey, Chinese FDI in Ethiopia (May 2012); and in- period and is exempt from import customs duties. terview with Huajian. Case studies 27 ii. Institutional framework, implementation (compared to China), abundant domestic supplies capacity and the SEZ authority: The insti- of leather, and its duty-free and quota-free access to tutional mechanisms underpinning the SEZ European and U.S. markets. These benefits are con- regulatory authority must balance authority and trasted with problems associated with inefficient cus- independence with inclusivity. The SEZ regula- toms clearance processes and the generally high cost tory authority, quality, capacity, and focus of the of trade logistics, which have hindered the company’s SEZ authority will often determine the success of competiveness in producing in Ethiopia. As one of the zone program; the primary manufacturing exporters from Ethiopia, iii. SEZ management and operations: this includes Huajian’s experiences indicate some of the broader zone management and “one-stop� service to issues faced by exporting companies from Ethiopia. investors in operationalizing their investments, Main issues identified during interviews with the including obtaining business licenses, export and company are: import licenses, work permits, health and safety  It is difficult to keep its production system pro- certificates, environmental clearances, and a wide cesses lean and as short as in China. In other range of other authorizations; words, for products produced in Ethiopia the time iv. Development of quality on-and-off-site infra- required from a client order to the delivery to the structure services (such as power, water, roads), client is longer than the standard from a similar which enables and facilitates the operation of order in China. Huajian’s lead time to the U.S. companies to be housed in the SEZ; and American clients is around 45 to 60 days from v. Customs, trade facilitation, and transport: In China, but it jumps to around 100 days from Ethi- successful zones, the customs operations are iden- opia. The latter includes 33 days of shipping raw tified as critical sources of competitive advantage materials from Hong Kong to Addis, 30 days of and are given the authority and capacity to deliver manufacturing in Addis, and 35 days of shipping an efficient clearance service. to the U.S. Due to the special characteristics of the shoe industry, which is following fashion trends Huajian – A Chinese Investor in Shoe which tend to be short-lived, a short lead time Manufacturing for Exports11 is critical to lead a successful business operation. According to Huajian, a possible remedy to Huajian’s investment in the Ethiopian shoe industry the lead time problem may be to use airfreight marks a distinct change from traditional Chinese instead of sea freight, especially on the delivery investment in infrastructure development in Ethio- route of factory to client in the U.S. (where pia. Huajian Group, based in Dongguan, Guangdong there is a direct flight between Addis Ababa and province, produces about 20 million pairs of shoes a Washington, DC). But it comes down to cost, year for famous shoe brands worldwide. It is one of and airfreight is much costlier than sea transpor- the largest Chinese shoe manufacturers, if not in the tation (US$2.37 per kilogram compared to 0.6 world. In Ethiopia, Huajian opened two production per kilogram). Negotiations are ongoing with both lines in Eastern Industry Zone at Dukem, 30 kilome- freight forwarders and clients to shoulder part of ters south of Addis Ababa, to produce about 2,000 the difference. pairs of shoes every day for the U.S. and European  Customs clearance times are not predicable, markets. It currently employs about 600 workers with probably the result of inexperienced customs staff the majority being Ethiopian. and inefficient management practices. Customs Huajian came to Ethiopia as a manufacturing clearance times can vary from five to 30 days investor to tap into the benefits of cheap labor costs (for the same products) according to Huajian’s 28 Chinese FDI in Ethiopia experience. There is a perception that customs major burden on new market entrants. Looking officers generally lack training and specific pro- at rental cost, Huajian finds that these are almost fessional skills. At the same time, there is limited double from similar cost in China (US$17 per exposure to international experiences and com- square meters vs. US$33). Huajian is currently petitors in the customs process, which adds to a tenant of EIZ. the problem. According to Huajian, a review of labor regu- According to Huajian, reforms in cus- lations may help to address the issue of labor cost, toms clearance process, setting up targeted and especially related to staff training. In the mean- demand-driven training and incentive schemes, time, additional tax incentives may help to ease as well as introducing international experiences the burden for new market entrants. may help to overcome these problems.  Inadequate infrastructure makes an overall very  Total logistics cost, labor cost, and rental cost challenging business environment in Ethiopia. are not as competitive as one would expect The inadequacy lies in three main areas. First, and in fact are often higher than in China. For blackouts are widespread and for long hours, example, the cost of one container from China to especially in the rainy season, thereby significantly Addis costs US$6,000, but one container from increasing cost. Second, the road from Djibouti’s China to the United States is US$2,000. The harbor to Huajian’s factory near Addis is in poor land transportation from Djibouti to Addis and condition, which results in longer transportation customs clearance cost account for eight percent time and higher cost. And third, telecommunica- of total cost, however, in China, the logistics cost tion fees are very expensive, which increases the can be as low as two percent. In China, labor cost of foreign investors who need to maintain cost only accounts for 22 percent of the total close contact with headquarters overseas. cost, whereas in Ethiopia labor cost makes up According to Huajian, targeted infrastructure as much as 33 percent, according to Huajian’s quality improvement could make a big difference experience. The main reason for the latter lies in to foreign investors. To this end, the Government staff training. When Huajian set up their factory may want to think about dedicated industrial in Ethiopia it had to send 86 Ethiopian university zones to offer cheap and infrastructure-connected graduates to China for two months. While these land, dedicated electricity grids, and broadband costs will diminish over time, they do represent a telecommunication services. 8 Summary and policy conclusions I n keeping with common perceptions the FDI a key feature of successful countries in the past survey shows evidence that Chinese inves- and especially in East Asia; special economic zones tors are creating jobs and adding value to the (SEZs) could play a crucial role in this. Ethiopian economy. In line with policies observed  Facilitate currency convertibility and increase in successful FDI destination countries, Ethiopia’s transparency of the exchange rate policy. political stability, cheap labor and land, as well as Restrictions on foreign currency transaction and the growing domestic market are attractive factors to conversion affect business operations, and discour- Chinese investors. However, there is still potential to age existing foreign invested enterprises to increase improve policy priorities to provide an enabling invest- investments and prevent entry of new investors. ment climate for foreign investors and to reduce the Large and unanticipated foreign exchange rate restrictions on FDI. movements, like the one in August/September Addressing identified obstacles could help 2010, increase the risk of doing business. This is Ethiopia to take better advantage of foreign inves- a particular concern of light manufacturing firms, tors to accelerate the shift from a predominantly which rely more heavily on imported supplies. low-productivity agriculture-based economy towards  Improve tax administration consistency and a higher-productivity manufacturing and export- efficacy. Inconsistent tax law explanations and based economy. Experiences in successful countries frequent law amendments increase uncertainty around the world, and especially in East Asia show in business operations for foreign companies. A that foreign investment is instrumental to the facili- more predictable and stable tax law practice would tation of such a structural transformation and to the likely attract more foreign investment. maintenance of sustained and broad-based economic  Execute impartial labor regulation. Ensuring development predictable and impartial labor regulations to Based on the analysis of motives to invest in Ethio- improve firm productivity and efficiency. pia and perceived obstacles, this study recommends  Increase the supply and quality of skilled five main areas for policy adjustments to facilitate workers. In the long-term this means to deepen foreign investors coming into Ethiopia so that education sector reforms and programs with a Ethiopia can reap the benefits it needs to further particular view of enhancing business-related its development path. These five policy areas are: skills (e.g. through vocational training), and to  Adjust customs clearance procedures and trade set-up programs to improve English (and possibly regulations. Streamlining procedures for customs Chinese) language skills. In the short-term this clearance would help foreign companies, which rely means to provide incentives for foreign companies on importing, to improve their supply chains and to offer more formal and on-site training for local thus increase firm productivity. It would also help employees (e.g. through linking training schemes to attract more export-oriented foreign companies, to tax holidays and other monetary incentives). References Adem, S. 2012. 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Annexes 34 Chinese FDI in Ethiopia Annex 1: Selected Breakdown of Motives of Chinese Investment into Ethiopia Breakdown of Motives to Invest: Breakdown of Motives to Invest: Good Understanding of Investment Climate Ethiopia Business Environment is Similar to (from social network) the one in China Breakdown by Type of Business Breakdown by Size of Company Breakdown by Type of Business Breakdown by Size of Company Construction Small Construction Small 8% 15% 8% 8% 6% 27% 20% 8% 20% 6% 8% 23% 15% 15% 7% 27% 31% 7% 7% 6% 40% 23% 38% 27% Manufacturing Medium Manufacturing Medium 9% 11% 7% 10% 13% 10% 3%10% 4% 6% 16% 3% 5% 3% 10% 7% 13% 14% 11% 13% 60% 67% 38% 57% Services Large Services Large 9% 4% 8% 8% 18% 14% 15% 13% 17% 8% 14% 8% 15% 17% 17% 25% 54% 14% 14% 73% 14% 21% Legend: The color code shows the percentage of respondents in each Legend: The color code shows the percentage of respondents in each category stating that: category stating that: Fully agree Mostly agree Neither agree nor disagree Fully agree Mostly agree Neither agree nor disagree Mostly disagree Fully disagree Question did not apply Mostly disagree Fully disagree Question did not apply Did not know Did not know Annexes 35 Breakdown of Motives to Invest: Breakdown of Motives to Invest: To take Advantage of Cheaper Labor in To take Advantage of Cheaper Land in Ethiopia Ethiopia Breakdown by Type of Business Breakdown by Size of Company Breakdown by Type of Business Breakdown by Size of Company Construction Small Construction Small 7% 13% 14% 13% 20% 23% 39% 13% 31% 23% 20% 34% 13% 13% 8% 23% 7% 15% 13% 31% 27% Manufacturing Medium Manufacturing Medium 7% 13% 10% 3% 9% 2% 13% 3% 5% 3% 20% 11% 27% 7% 22% 23% 5% 7% 13% 44% 50% 24% 9% 22% 37% Services Large Services Large 9% 8% 9% 9% 9% 18% 13% 9% 8% 9% 21% 8% 18% 9% 25% 46% 37% 21% 18% 33% 55% 4% 4% Legend: The color code shows the percentage of respondents in each Legend: The color code shows the percentage of respondents in each category stating that: category stating that: Fully agree Mostly agree Neither agree nor disagree Fully agree Mostly agree Neither agree nor disagree Mostly disagree Fully disagree Question did not apply Mostly disagree Fully disagree Question did not apply Did not know Did not know 36 Chinese FDI in Ethiopia Breakdown of Motives to Invest: Breakdown of Motives to Invest: To enter the Local Market To take Advantage of Limited Capacity and in Ethiopia Competition in Ethiopia Breakdown by Type of Business Breakdown by Size of Company Breakdown by Type of Business Breakdown by Size of Company Construction Small Construction Small 8% 15% 7% 13% 13% 31% 7% 31% 20% 38% 7% 7% 31% 43% 53% 13% 13% 15% 15% 8% 7% 8% Manufacturing Medium Manufacturing Medium 11% 15% 17% 13% 11% 15% 13% 2% 20% 7% 7% 7% 10% 7% 17% 7% 40% 22% 36% 16% 42% 40% 10% 3% 9% Services Large Services Large 9% 9% 13% 18% 13% 8% 9% 27% 21% 9% 4% 8% 4% 21% 9% 9% 25% 21% 37% 64% 25% 37% Legend: The color code shows the percentage of respondents in each Legend: The color code shows the percentage of respondents in each category stating that: category stating that: Fully agree Mostly agree Neither agree nor disagree Fully agree Mostly agree Neither agree nor disagree Mostly disagree Fully disagree Question did not apply Mostly disagree Fully disagree Question did not apply Did not know Did not know Annexes 37 Breakdown of Motives to Invest: Breakdown of Motives to Invest: Incoming Investment Incentives from Outgoing Investment Incentives from Ethiopian Government Chinese Government Breakdown by Type of Business Breakdown by Size of Company Breakdown by Type of Business Breakdown by Size of Company Construction Small Construction Small 8% 7% 8% 6% 31% 20% 31% 27% 20% 23% 27% 23% 7% 7% 13% 15% 13% 15% 15% 27% 23% 13% 13% 8% Manufacturing Medium Manufacturing Medium 3% 2% 7% 2% 9% 13% 18% 17% 7% 3% 23% 29% 23% 40% 7% 4% 7% 31% 3% 40% 3% 9% 38% 40% 11% Services Large Services Large 9% 9% 4% 8% 9% 18% 9% 21% 8% 34% 27% 28% 9% 4% 42% 18% 25% 21% 18% 9% 21% 37% 12% Legend: The color code shows the percentage of respondents in each Legend: The color code shows the percentage of respondents in each category stating that: category stating that: Fully agree Mostly agree Neither agree nor disagree Fully agree Mostly agree Neither agree nor disagree Mostly disagree Fully disagree Question did not apply Mostly disagree Fully disagree Question did not apply Did not know Did not know 38 Chinese FDI in Ethiopia Breakdown of Motives to Invest: Breakdown of Motives to Invest: Better Business Environment in Ethiopia Better Business Environment in Ethiopia than in China – in general than in China – lower tax Breakdown by Type of Business Breakdown by Size of Company Breakdown by Type of Business Breakdown by Size of Company Construction Small Construction Small 13% 8% 13% 15% 20% 20% 39% 8% 38% 7% 13% 7% 46% 13% 15% 20% 27% 27% 8% 20% 8% 15% Manufacturing Medium Manufacturing Medium 11% 14% 13% 7%4% 13% 3% 4% 20% 3% 30% 5% 7% 7% 3% 10% 18% 18% 67% 40% 10% 51% 42% Services Large Services Large 9% 9% 9% 4% 18% 17% 12% 13% 9% 9% 21% 4% 9% 4% 21% 40% 17% 9% 27% 33% 37% 25% 18% 29% Legend: The color code shows the percentage of respondents in each Legend: The color code shows the percentage of respondents in each category stating that: category stating that: Fully agree Mostly agree Neither agree nor disagree Fully agree Mostly agree Neither agree nor disagree Mostly disagree Fully disagree Question did not apply Mostly disagree Fully disagree Question did not apply Did not know Did not know Annexes 39 Annex 2: Selected Breakdown of Obstacles for Chinese Investment into Ethiopia Breakdown of Possible Obstacles: Breakdown of Possible Obstacles: Electricity Water Breakdown by Type of Business Breakdown by Size of Company Breakdown by Type of Business Breakdown by Size of Company Construction Small Construction Small 8% 7% 7% 8% 8% 7% 8% 7% 14% 29% 15% 7% 23% 29% 31% 29% 46% 21% 46% 36% Manufacturing Medium Manufacturing Medium 3% 6% 2% 3% 5% 5% 2% 6% 3% 16% 5% 13% 3% 2% 19% 29% 22% 22% 33% 19% 25% 12% 10% 34% 31% 34% 29% 13% Services Large Services Large 7% 13% 7% 13% 7% 17% 7% 7% 36% 43% 39% 29% 13% 22% 31% 43% 17% 14% 35% Legend: The color code shows the percentage of respondents in each Legend: The color code shows the percentage of respondents in each category stating that there was: category stating that there was: No obstacle Minor obstacle Moderate obstacle No obstacle Minor obstacle Moderate obstacle Major obstacle Very severe obstacle Question did not apply Major obstacle Very severe obstacle Question did not apply Did not know Did not know 40 Chinese FDI in Ethiopia Breakdown of Possible Obstacles: Breakdown of Possible Obstacles: Transport Customs Breakdown by Type of Business Breakdown by Size of Company Breakdown by Type of Business Breakdown by Size of Company Construction Small Construction Small 8% 8% 7% 7% 14% 20% 7% 29% 25% 46% 33% 59% 43% 80% 14% Manufacturing Medium Manufacturing Medium 2% 4% 5% 7% 7% 15% 14% 3% 7% 19% 14% 12% 36% 38% 18% 15% 22% 32% 17% 32% 17% 14% 21% 29% Services Large Services Large 4% 8% 7% 7% 4% 9% 15% 23% 17% 12% 17% 9% 21% 8% 29% 13% 22% 54% 46% 36% 39% Legend: The color code shows the percentage of respondents in each Legend: The color code shows the percentage of respondents in each category stating that there was: category stating that there was: No obstacle Minor obstacle Moderate obstacle No obstacle Minor obstacle Moderate obstacle Major obstacle Very severe obstacle Question did not apply Major obstacle Very severe obstacle Question did not apply Did not know Did not know Annexes 41 Breakdown of Possible Obstacles: Breakdown of Possible Obstacles: Access to Land Crime Breakdown by Type of Business Breakdown by Size of Company Breakdown by Type of Business Breakdown by Size of Company Construction Small Construction Small 8% 16% 8% 7% 23% 17% 17% 8% 8% 34% 8% 8% 7% 17% 8% 31% 46% 8% 50% 46% 25% Manufacturing Medium Manufacturing Medium 13% 3% 3% 3% 2% 10% 21% 16% 7% 3% 7% 3% 3% 7% 14% 20% 12% 24% 21% 34% 9% 64% 13% 67% 12% 10% Services Large Services Large 28% 9% 14% 8% 8% 9% 8% 28% 9% 9% 9% 34% 27% 32% 50% 26% 48% 18% 27% 9% Legend: The color code shows the percentage of respondents in each Legend: The color code shows the percentage of respondents in each category stating that there was: category stating that there was: No obstacle Minor obstacle Moderate obstacle No obstacle Minor obstacle Moderate obstacle Major obstacle Very severe obstacle Question did not apply Major obstacle Very severe obstacle Question did not apply Did not know Did not know 42 Chinese FDI in Ethiopia Breakdown of Possible Obstacles: Breakdown of Possible Obstacles: Tax Regulation Access to Financing Breakdown by Type of Business Breakdown by Size of Company Breakdown by Type of Business Breakdown by Size of Company Construction Small Construction Small 8% 8% 8% 23% 7% 15% 23% 27% 15% 25% 23% 8% 33% 16% 59% 20% 23% 46% 13% Manufacturing Medium Manufacturing Medium 3% 3% 8% 3% 17% 3% 10% 8% 14% 10% 14% 14% 13% 20% 15% 14% 10% 19% 12% 23% 10% 18% 13% 14% 33% 27% 25% 28% Services Large Services Large 9% 9% 13% 15% 5% 18% 31% 5% 9% 24% 23% 27% 23% 15% 29% 37% 8% 28% 9% 32% 8% 23% Legend: The color code shows the percentage of respondents in each Legend: The color code shows the percentage of respondents in each category stating that there was: category stating that there was: No obstacle Minor obstacle Moderate obstacle No obstacle Minor obstacle Moderate obstacle Major obstacle Very severe obstacle Question did not apply Major obstacle Very severe obstacle Question did not apply Did not know Did not know Annexes 43 Breakdown of Possible Obstacles: Breakdown of Possible Obstacles: Labor Regulations Inadequately Educated Workforce Breakdown by Type of Business Breakdown by Size of Company Breakdown by Type of Business Breakdown by Size of Company Construction Small Construction Small 8% 17% 8% 8% 8% 23% 31% 17% 15% 31% 33% 42% 42% 25% 31% 31% 15% 15% Manufacturing Medium Manufacturing Medium 3% 7% 3% 4% 5% 10% 3% 17% 3% 3% 3% 29% 22% 24% 30% 28% 30% 25% 13% 17% 17% 15% 22% 21% 18% 12% 17% Services Large Services Large 4% 8% 15% 9% 25% 25% 22% 15% 14% 32% 22% 15% 8% 8% 22% 18% 25% 17% 30% 39% 27% Legend: The color code shows the percentage of respondents in each Legend: The color code shows the percentage of respondents in each category stating that there was: category stating that there was: No obstacle Minor obstacle Moderate obstacle No obstacle Minor obstacle Moderate obstacle Major obstacle Very severe obstacle Question did not apply Major obstacle Very severe obstacle Question did not apply Did not know Did not know the World Bank 1818 H Street, Nw Washington, DC 20433