Foreign direct investment and local spillovers in the apparel sector in Sub-Saharan Africa

Foreign direct investment (FDI) in the apparel sector in several Sub-Saharan African (SSA) countries has experienced significant growth in the context of preferential market access. But expectations of FDI leading to spillovers to the local economy and the development of locally-embedded apparel export industries have not materialized. A shift from FDI attraction through fiscal incentives to more strategic industrial policies that target FDI spillovers, local value added and linkages is urgently needed for broader local development effects

Financial markets and the commodity price boom: Causes and implications for developing countries

The current commodity price boom in combination with high price volatility is historically unprecedented even in the volatile price history of commodities. Commodity price dynamics have crucial macroeconomic and development implications, in particular for commoditydependent low-income countries. Commodity prices are determined by fundamental supply and demand conditions which have experienced important structural changes in the last decade related to increasing demand from highly growing emerging countries, alternative uses of commodities for energy production, and a reduction in supply due to supply constraints and low productivity. However, these factors alone are not sufficient to explain recent commodity price developments, particularly the large fluctuations between 2008 and 2011. Simultaneously to fundamental changes, trading activities on commodity derivative markets have undergone a major shift related to the increasing presence of financial investors, including banks, institutional investors and hedge funds, that has had effects on the microstructure of these markets and on price dynamics. This paper discusses these changes with regard to fundamental factors and commodity derivative markets and assesses their impact on commodity prices. Further, the paper identifies implications of these developments for developing countries and policy reforms with the objective to stabilize commodity prices and mitigate the negative impacts of the commodity price boom on developing countries

Value chains for development? Potentials and limitations of global value chain approaches in donor interventions

Value chain interventions are increasingly used by international organizations and national donor agencies in the context of their private sector development (PSD) activities. These interventions are broadly labeled as value chains for development and share common characteristics such as the focus on improving market access conditions for and upgrading opportunities of developing country firms and producers to promote market-based and often export-oriented development. They differ however also along certain dimensions, most importantly with regard to the explicit focus on broader development objectives, the scope and specific activities supported, and the type of targeted actors for the intervention (Henrikson et al. 2010; Humphrey/Navas-Aleman 2010). The global value chain (GVC) framework and the academic literature on GVCs that has developed in the last two decades are broadly used as a basis for donor-led value chain interventions. The paper argues that taking the GVC framework as a basis for interventions to support private sectors in developing countries has the potential to make PSD interventions more effective in terms of improving economic and social outcomes of participating in international trade and global production. To secure the effectiveness of value chain interventions and their development effects, two factors are however critical: First, integration in GVCs should not be seen as "a panacea" for development but as "windows of opportunity" (Phillips/Henderson 2009: 60) that can have important development effects but should be complemented by more locally and regionally based development approaches (th0at may in itself involve the development of local or regional value chains). Second, the critical tradition and broader perspective of the GVC literature needs to be brought back and taken into account when re-designing existing or initiating new generations of value chain policies and interventions (Neilson/Pritchard 2011), in particular the focus on structural and asymmetric power relationships, the ambivalent role of lead firms, the important role of institutions and particularly the state and strategic state policies, and the focus on broader socio-economic and poverty reducing effects

Apparel exports - still a path for industrial development? Dynamics in apparel global value chains and implications for low-income countries

The apparel sector has traditionally been a gateway to export diversification and industrial development for low-income countries (LICs). In the context of heightened competition and recent changes in the global apparel sector related to trade liberalization and global buyers' sourcing policies, the paper discusses to what extent the apparel sector can still provide this role for LICs today. Recent developments have important implications for LICs that aim to develop through apparel exports, in particular related to (i) increasing entry barriers and global consolidation, (ii) global demand, supply and asymmetric market structures, (iii) high competition in wages and labor standards, (iv) shifting end markets to emerging and regional markets, and (v) the importance of foreign investment with often limited local linkages. The paper concludes that global consolidation and asymmetric market and power structure have increased entry barriers and made upgrading processes more complicated and contested. Even if LIC suppliers fulfill higher requirements and achieve upgrading this does not necessarily secure improved rewards in terms of higher prices, more secure orders and better working conditions. However, shifting end markets to large developing countries, regional and domestic markets, and the increasing importance of developing countries' buyers lead to new opportunities for LIC apparel exporters. Overall, the sector still provides opportunities for industrial development; however, this requires proactive industrial policies in LICs to further upgrading and local value capture as well as a focus away from solely exporting to the US and Europe to regional and domestic markets. At the EU and international level, regulations to secure labor standards and responsible business practices of buyers and changes in the trade and investment regime to increase policy space to support upgrading and industrial development in LICs are necessary

Local embeddedness, upgrading, and skill development: Global value chains and foreign direct investment in Lesotho's apparel industry

Many low-income countries (LICs) are integrated into apparel global value chains (GVCs) through foreign direct investment (FDI). This is also the case in Lesotho that has developed to the largest Sub-Sahara African (SSA) apparel exporter to the US under the African Growth and Opportunity Act (AGOA). More recently, a new apparel export market has emerged in Lesotho the regional market of South Africa. The two export markets US and South Africa are supplied by different types of FDI firms affiliates of largely Taiwanese transnational producers and South African manufacturers that are incorporated into distinct value chains. This paper assesses the implications for upgrading of integration into these two value chains in Lesotho - the value chain characterized by Taiwanese investment and feeding into the US market under AGOA and the value chain characterized by South African investment and feeding into the South African market. These value chains differ with regard to ownership patterns, end markets, export products, governance structures and firm set up, investors motivations, and perceptions on main challenges. These different characteristics have crucial impacts on upgrading possibilities, including functional, process and "local" upgrading. Thus, from the perspective of upgrading and sustainability, ownership patterns, local embeddedness and market diversification matter. The emergence of South Africa as an alternative end market and the different value chain dynamics operating in the South African retailer-governed value chain open up new opportunities from those of the AGOA/Taiwanese-dominated value chain

Financialisation and the microstructure of commodity markets: A qualitative investigation of trading strategies of financial investors and commercial traders

The financialisation of commodity derivative markets, reflected in the increased presence of financial investors, and its effects on commodity prices and the fundamental roles of these markets, i.e. price discovery and price risk management for commercial traders, have been controversially discussed. This working paper provides an analysis of the microstructure of commodity derivative markets with a focus on the commodities coffee, cotton, wheat and aluminium. Two questions are in the center: firstly, how, in the context of financialisation, have the composition of traders and their trading strategies changed, and, secondly, how have the increasing presence and trading strategies of financial investors affected commercial traders, price discovery and hedging. The analysis builds on interviews with different types of market participants and relevant stakeholders. The paper finds that the increasing and often dominating role of financial investors has changed the microstructure of commodity derivative markets in terms of trading volumes and open interest positions, market participants, investment products and strategies, speed and complexity. The common classification of traders put forward by the US Commodity Trading Futures Commission seems to abstract too much from the reality in commodity markets given the multiple and interrelated roles of traders.Financial investors may have multiple roles, which include physical trading, and large commercial traders such as multinational trading houses typically pursue hedging and speculative trading strategies. Though financial investors are widely believed to increase the likelihood of excessive short term price fluctuations and commercial traders take into account their presence and strategies in their own trading behavior, they impact commercial traders in different ways. Large commercial traders seem not to be concerned about their increasing role or even perceive their presence as advantageous. But smaller commercial traders that do not have the resources and capacity to interact actively with derivative markets seem to find it more difficult to use markets for hedging given the increased complexity, speed and short-terminism and related higher risks and costs

"Precarious upgrading" in electronics global production networks in Central and Eastern Europe: The cases of Hungary and Romania

The electronics manufacturing sector has played a prominent role in export-oriented development strategies, as participation in this high-tech industry promises access to new technology, high skilled jobs and a fast-growing market. Against this background, many governments in Central and Eastern Europe (CEE) have sought to attract investment in this sector, where foreign firms became the key actors in reshaping after 1989 and where integrating into global production networks (GPNs) was widely embraced as a means to modernize and upgrade local industries. We assess to what extent the potential benefits arising from integrating into electronics GPNs have materialized in Hungary, an established player and the most important electronics exporting country in the region, and Romania, a newcomer country in electronics manufacturing. To analyse these questions, we look at the organizational and geographical configuration of the electronics sector and examine the impact integration into these networks has had on local firms and workers and to what extent this integration has led to economic and social upgrading. With regard to economic upgrading processes, we suggest that the upgrading concept needs to pay more attention to the 'reach' of economic upgrading. This is particularly important when integration into GPNs takes place via foreign direct investment (FDI), where economic upgrading processes may be focused on transnational corporations (TNCs) with limited spillovers to local firms. The social upgrading trajectory is influenced importantly by global industry dynamics, for example high flexibility pressures and the tiered nature of the workforce in electronics GPNs, and countries' specific institutional and regulatory contexts

Private sector development: Business plan or development strategy?

Private sector development (PSD) has taken on an increasingly prominent role in international development cooperation. This note argues that the private sector has to play an important role in sustainable economic and inclusive development but points out three concerns for effective PSD interventions: PSD is not a 'technical solution' but there are different theoretical approaches to the question which policies support a sustainable and inclusive private sector. There is no 'one' homogenous private sector but important interest conflicts and the interest of foreign firms should not be equated with the interest of the local private sector and national development concerns. A pro-development international policy environment in particular in the areas of trade and investment policies is crucial for PSD which stresses the importance of donors' policy coherence

Re-regulation of commodity derivative markets: Critical assessment of current reform proposals in the EU and the US

In the context of recent commodity price hikes, a political consensus has emerged on regulatory measures to reduce excessive speculation in commodity derivative markets. This paper gives an overview of current reform proposals of commodity derivate market regulation at the international (G20), US and EU level and assesses their scope and limitations. For such an assessment, the primary functions of commodity derivative markets for the real economy, i.e. price discovery and price risk hedging for commercial traders have to be taken as a benchmark. The paper concludes that important regulatory initiatives have been under way with a focus on improving transparency, regulating over the counter trade, installing position limits and strengthening regulatory authorities. However, there are important limitations, in particular in the form of broad exemptions (e.g. concerning position limits and commercial traders). Regulations that would more substantially reduce the dominance of financial investors and ensure the dominance of fundamentally based trading strategies have only marginally been addressed, such as restrictions on certain trading strategies (e.g. indexbased investments, technical/algorithmic trading, high frequency trading) and price stabilization mechanisms such as a multitier financial transaction tax. A prerequisite for effective regulation is a pro-active, flexible and dynamic approach that reflects on the risks of failure and adapts regulations if necessary given the changing dynamics and complexities of markets. Further, effective regulation has to take into account the multiple and interrelated roles of financial and large commercial traders being increasingly involved in speculative derivative and physical commodity trading

Cotton-based development in Sub-Saharan Africa? Global commodity chains, national market structure and development outcomes in Burkina Faso, Mozambique and Tanzania

Cotton is one of the most important cash crops in Sub-Saharan Africa (SSA) and has had an important role in job creation, poverty reduction and foreign exchange generation. SSA cotton exporters face particularly three interconnected challenges - how to increase yields and quality in the context of small holder farming; how to deal with volatile international prices; how to increase value addition through local processing. This paper analyses the cotton sectors in Burkina Faso, Mozambique and Tanzania along these challenges focusing on dynamics in global cotton commodity chains, different national market structures and related development outcomes. The aim of the paper is not to identify the best cotton sector organisation model but to point out issues that are important for positive development outcomes. The analysis shows that the more regulated systems in Burkina Faso and Mozambique generally outperform the liberalized system in Tanzania in terms of production levels, yields, input provision, and price stability. But there are also major differences among the more regulated systems with Burkina Faso faring substantially better in yields and farmers' price share. The state, however, also bears a greater risk in Burkina Faso through its involvement in the largest cotton company and the stabilisation fund. The system in Tanzania provides similar farmers' price shares as in Burkina Faso albeit with higher price instability and inequality. Tanzania has been further most successful in value addition which, however, cannot be attributed to the cotton sector market structure but primarily to a stronger manufacturing tradition. The institutional context in the cotton sector, particularly strong and independent farmers' associations, have a crucial role in all models to ensure that farmers' interests are respected