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China-Africa and an Economic Transformation$

Arkebe Oqubay and Justin Yifu Lin

Print publication date: 2019

Print ISBN-13: 9780198830504

Published to Oxford Scholarship Online: June 2019

DOI: 10.1093/oso/9780198830504.001.0001

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China’s Light Manufacturing and Africa’s Industrialization

China’s Light Manufacturing and Africa’s Industrialization

(p.265) Chapter 13 China’s Light Manufacturing and Africa’s Industrialization
China-Africa and an Economic Transformation

Justin Yifu Lin

Jiajun Xu

Oxford University Press

Abstract and Keywords

This chapter aims to explore whether and how China’s light manufacturing transfer can help to drive Africa’s industrialization. First, it examines the opportunities and challenges presented by the transfer of light manufacturing from contemporary China to low-wage developing countries from the historical perspective of the ‘flying geese’ pattern. Second, it uses first-hand survey data to explore how Chinese light manufacturing firms have coped with rising labour costs, what types of firms are more likely to relocate their manufacturing capacity to low-wage destinations, and where firms tend to relocate their production line. Third, it examines how ‘pilot’ Chinese light manufacturing firms have overcome first-mover challenges. Finally, it employs the analytical framework of New Structural Economics to make policy recommendations on how to mitigate binding constraints to help African countries seize the window of opportunity of industrial transfer from China to achieve economic structural transformation.

Keywords:   New Structural Economics, flying geese, industrialization, light manufacturing, industrial transfer

13.1 Introduction

Industrialization is back at the top of the development agenda. At the global level, Sustainable Development Goals (SDGs) place high priority on the objective to ‘build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation’.1 At the regional level, in its Agenda 2063 the African Union has articulated a strategic framework for economic transformation, with a special focus on manufacturing-based industrialization to escape from the commodity dependence trap.2

Yet Africa is experiencing premature de-industrialization. Developing countries have experienced falling manufacturing shares in both employment and real value added, especially since the 1980s. This de-industrialization trend is ‘premature’, because these developing countries are ‘running out of industrialization opportunities sooner and at much lower levels of income compared to the experience of early industrializers’ (Rodrik, 2016). Despite recent rapid growth, manufacturing is a smaller share of output and employment in Africa today than it was in the mid-1980s (Brookings, 2014). For example, in the case of Tanzania the manufacturing sector’s share in GDP and growth rate has remained relatively stagnant over the past decade (Wangwe et al., 2016). In 2017 sub-Saharan Africa’s average share of manufacturing value added in GDP was only 10 per cent, down from over 20 per cent in the 1980s (see Figure 13.1).3

China’s Light Manufacturing and Africa’s Industrialization

Figure 13.1. Manufacturing, value added (per cent of GDP) in sub-Saharan Africa

Source: World Development Indicators, World Bank

(p.266) Most successful industrializers, including those in East Asia after World War II, captured the opportunity to transform their agrarian economies to industrialized economies presented by the global relocation of light manufacturing from higher-income countries when the latter were losing comparative advantage in light manufacturing due to rising wages (Lin, 2012b). As wages have been rising rapidly in China in recent years, labour-intensive light manufacturing firms are losing their comparative advantages. Will these light manufacturing firms, like their predecessors in the past, relocate their production capacity to low-wage developing countries, especially sub-Saharan African countries with abundant labour forces? Will such industrial transfer help to drive Africa’s industrialization? This chapter aims to explore whether and how China’s light manufacturing transfer can help to promote Africa’s industrialization. The key argument of the chapter is that the pending relocation of Chinese light manufacturing sectors presents an unprecedented opportunity for African countries to foster industrialization in line with their latent comparative advantage but that the facilitation of key stakeholders, especially African governments, is required in order to realize this huge potential.

The chapter proceeds as follows. First, it examines the opportunities and challenges presented by the transfer of light manufacturing from contemporary China to low-wage developing countries from the historical perspective of the ‘flying geese’ pattern. Second, it uses first-hand survey data in China’s Yangtze River and Pearl River Delta regions to explore how Chinese light manufacturing firms have coped with rising labour costs, what types of firms are more likely to relocate their manufacturing capacity to low-wage destinations, and where firms tend to relocate their production lines. Third, it (p.267) examines how ‘pilot’ Chinese light manufacturing firms transferring their production capacity to help create jobs and promote exports in Africa have overcome first-mover challenges. Finally, using the analytical framework of New Structural Economics, it makes policy recommendations on how to mitigate binding constraints to help African countries seize the window of opportunity of industrial transfer from China to achieve economic structural transformation.

13.2 From Flying Geese to Leading Dragons

Historically, the era of economic globalization has witnessed a ‘flying geese’ model in which a more advanced country (the ‘lead goose’) opens the market space, transfers capital, technology, and management skills to a less developed country (a ‘follower goose’) and so facilitates their economic structural transformation (Akamatsu, 1962).4 Since beginning to open up its economy and embark on market reform in the late 1970s, China has seized the window of opportunity by attracting light manufacturing firms from the East Asian ‘tigers’, especially Korea, Hong Kong, and Taiwan. Labour-intensive light manufacturing sectors were well in line with the latent comparative advantage of mainland China, which helped to tap into its abundant and cheap labour forces. China’s economic miracle has defied the conventional wisdom that developing countries on the periphery of the global economy suffer from deteriorating terms of trade and are unable to converge with developed countries in the core. Yet this does not mean that latecomers will automatically benefit from industrial transfer from advanced economies, as the transformation process entails proactive efforts to seize the opportunity and realize the potential for moving up global value chains.

Real wages in Chinese manufacturing sectors are much higher than those in Africa. Moreover, real wages have been rising since the mid-2000s; the annual rise of about 10 per cent from 2003 to 20165 is also likely to be much greater than that in African countries.6 This trend towards an enlarging relative wage gap has sparked heated debates on whether rising wages in China will herald a new wave of relocation of manufacturing jobs to less prosperous low-wage developing countries.

(p.268) The need to answer this question is more urgent than ever before. The immense scale of China’s manufacturing is unprecedented. With China losing its competitiveness in labour-intensive industries, it is estimated that about 85 million factory jobs fall into the category of light manufacturing industry in China (Lin, 2012b).

On the one hand, optimists maintain that the unparalleled scale of relocation of Chinese manufacturing could foster economic structural transformation on the African continent and in other parts of the developing world, as a surging youth population enters their labour market (Lin, 2012b). While data limitations make it hard to calculate the exact amount of Chinese outbound light manufacturing FDI into Africa, there is a visible sign of growing Chinese engagement with Africa as far as light manufacturing is concerned. According to the ‘Statistical Bulletin of China’s Outward Foreign Direct Investment’, Chinese outward FDI into Africa grew from US$0.07 billion in 2003 to US$2.4 billion in 2016. A Brookings Institution study used official Chinese data—company registrations of their outward investment plans with the Ministry of Commerce (MOFCOM)—to estimate that there were about two thousand Chinese enterprises in Africa (Chen et al., 2014). Of these, the authors suggest that about 1,170 firms are in a category they label ‘agricultural and manufacturing’. Of these, about 250 firms are in light manufacturing-linked sectors. Yet MOFCOM’s ODI registration data underestimate Chinese overseas direct investment, as it is an administrative database rather than a representative survey of Chinese overseas investors (Rosen and Hanemann, 2009; Tan, 2013).7 To address the limitation of this official dataset, McKinsey conducted a bottom-up survey in Africa and discovered that there were about ten thousand Chinese firms on the continent, of which about one-third are in manufacturing. It found that in the eight selected African countries, the number of Chinese-owned firms was between double and nine times the number registered by MOFCOM (Sun, Jayaram, and Kassiri, 2017). In other words, there may be many Chinese relocated firms under the radar. This comes with a caveat that despite the rapid growth in Chinese FDI into Africa, the relative share of Chinese FDI inflows in Africa remained around a modest 5 per cent in terms of stock from 2013 to 2016.8

(p.269) Sceptics, on the other hand, contend that a series of secular trends have dimmed the upbeat prospects that light manufacturing jobs will be relocated from China to other low-wage developing countries on an unparalleled scale, unleashing their potential for economic transformation. First, global demand for traditional light manufacturing products, especially in Europe and North America, is declining. Second, labour absorption capacity in light manufacturing sectors is lower than before. Automation may further render more and more of the labour force redundant. This means that the potential for job creation has been undermined even if industrial transfer does occur. Last but not least, economic transformation in low-wage developing countries will not come to fruition unless the right conditions are created. Relocating manufacturing jobs from China to other developing countries will not happen unless roads, power supplies, and ports are adequate. Relocation to low-wage developing countries is unlikely to happen unless there is political stability and policy consistency. Without these soft and hard infrastructures in place, low-wage developing countries will lose the opportunity of industrial upgrading and economic transformation. Hence, realizing this great potential requires effective policy levers to put the right conditions in place.

Despite the above debates, little empirical research is available exploring the opportunities and challenges of Chinese manufacturing relocation to Africa. This is the gap that the pilot survey described below aims to fill.

13.3 A Pilot Survey of Chinese Light Manufacturing

In order to have a better understanding of the opportunities and challenges of relocating Chinese light manufacturing production capacity to low-wage developing countries in general and Africa in particular, it is important to collect first-hand firm-level empirical data. Although household surveys, such as the China Health and Retirement Longitudinal Study (CHARLS), are well developed in China, firm surveys face several challenges, especially in relation to access to the firms and to quality control.9 To overcome these challenges, the Institute of New Structural Economics (INSE) and the Overseas Development Institute (ODI) collaborated on a pilot survey in 2017 to find out how Chinese light manufacturing firms cope with rising labour costs, what types of firms are more likely to relocate their manufacturing capacity to low-wage destinations, and where firms tend to relocate their production lines (Xu et al., 2017). (p.270) This pilot firm-level survey was complemented by in-depth case studies on garment firms.

To make the pilot survey feasible, we selected four labour-intensive light manufacturing sectors—home appliances, garments, footwear, and toys—collectively employing about 16 million workers in China. We focused on light manufacturing firms from the four selected sectors in the Yangtze River Delta (YRD) and Pearl River Delta (PRD) regions, where light manufacturing firms are geographically concentrated.10

A cluster-based sampling strategy was used, since industrial clustering is crucial in the development of Chinese manufacturing.11 The sampling frame used in the project is the database of above-scale industrial firms with revenue from their principal business of above RMB 20 million (US$3 million) in 2013 according to the National Bureau of Statistics in China.12 The sample also took into account realistic potential for outward investment, by restricting inclusion to ‘above-scale’ firms which were exporting more than half of their turnover. In the end, we surveyed 640 firms, with the response rate of over 40 per cent much higher than initially expected (see Table 13.1 for the detailed distribution of firms by sector and region).

Table 13.1. Details of enterprises by sector and region

Surveyed firms

Sampled firms







Home appliances

146 (23)

129 (20)

275 (43)

274 (19)

247 (17)

521 (37)


75 (12)

121 (19)

196 (31)

257 (18)

324 (23)

581 (41)



89 (14)

89 (14)


188 (13)

188 (13)



80 (13)

80 (13)


133 (9)

133 (9)


221 (35)

419 (65)

640 (100)

531 (37)

892 (63)

1,423 (100)

Note: 1. Brackets are percentages of total survey (640) in ‘Surveyed Firms’ column, or total sample (1,423) in ‘Sampled Firms’ column. 2. In the end, we selected firms in the footwear and toy sectors only from Guangdong Province, as both sectors are geographically concentrated in Guangdong.

Source: Institute of New Structural Economics and the Overseas Development Institute

A key finding from the survey is that rising labour costs have been the number one challenge facing firms. With annual wage growth rate of 10–20 per cent from 2014 to 2016, more than 80 per cent of firms considered rising labour costs (including wages, welfare, and social insurance) one of their three main challenges. Nearly half of these firms regarded rising labour costs as the top challenge. In addition, the rising costs of raw material inputs and shrinking demand for their products have squeezed profitability. As a result, many Chinese firms are losing competitive advantage.

(p.271) In response to rising labour costs, more than half of the enterprises surveyed regarded technological upgrading as their preferred strategy to reduce labour costs and increase labour productivity. While replacing labour with machines appears to be the dominant strategy adopted by firms, automation, as a principal form of technological upgrading, has its own limitations in its application to light manufacturing sectors. First, the investment required for automated equipment is so large that it goes beyond the capacity of small and medium firms. Second, many manufacturing processes in specific sectors such as garments or footwear are difficult to automate. For example, cutting, sewing, buttoning, ironing, and garment inspection cannot be entirely undertaken by machines. Third, automation also has maintenance costs and technical personnel requirements. Other strategies adopted by a number of respondents in response to rising labour costs were tightening cost control over inputs and production, and changing product lines or expanding markets.

It seems that the wave of relocations of production lines abroad is yet to occur. Only 10 per cent of the firms surveyed had invested abroad in the past or planned to do so in the next three years. Yet this may be an underestimate of the number of ‘flying geese’ for two reasons. First, the survey could not include firms which had already relocated in their entirety.13 Second, investments abroad by parent companies of surveyed firms were not reported in responses.14 Even using this conservative ratio of 10 per cent, a rough estimate (p.272) of potentially relocated Chinese light manufacturing jobs stands at about 8.5 million.15 While this is relatively small, as an additional 185 million of the labour force will be searching for jobs by 2030 in Africa, it is still significant in absolute terms.

But it is worth noting that relocating light manufacturing capacity abroad is gaining pace. Despite the relatively small numbers of ‘flying geese’ up to now, a large proportion of relocations to low-wage developing countries have occurred since 2010.

When we have a close look at the ‘flying geese’, it turns out that large foreign-owned footwear and garment firms engaging in original design manufacturing (ODM) are more likely to relocate their production capacity. This finding helps to shed light on the question of what kinds of firms have a greater tendency to become ‘flying geese’.

First, larger firms were in general more likely to expand or transfer production abroad than smaller firms. About 12 per cent of large firms with more than 1,000 employees relocated, compared with 7 per cent of medium firms with 300–999 employees and 4 per cent of small firms with 20–299 employees. Relocating production capacity abroad entails high risks especially when the host country suffers from political instability and macroeconomic fluctuations. Big firms may have greater capacity to mitigate risks and cope with challenges.

Second, foreign-owned firms have a greater tendency to relocate abroad than domestic-owned ones. Though only 8 per cent of foreign-owned firms preferred relocation abroad as their strategy for coping with rising costs, they were four times more likely to choose this option than domestic-owned firms. One possible reason is that foreign-owned private enterprises located in the Pearl River Delta (a large group within the survey) already have experience of overseas investment. In other words, foreign-owned firms are experienced ‘flying geese’ which can anticipate the wave of relocation in advance instead of taking a wait-and-see attitude.

Third, firms in the footwear and garment sector are considerably more likely to relocate abroad than firms in the home appliances and toy sectors. Twenty-seven per cent of footwear firms and 5.6 per cent of garment firms either had already invested abroad or planned to do so in the next three years, compared with 1.8 per cent in the home appliances sector and 1.3 per cent in the toy sector. This intriguing pattern begs further investigation. One possible reason is that mechanization in production is difficult in the footwear and garment sectors. In other words, labour cannot be readily replaced by machine so that (p.273) firms have to relocate to low-wage regions to bring down production costs. A second possible reason is that supply chains are relatively simple in footwear and garments compared to household appliances and toys, so reducing wage costs is more likely to compensate for rising logistical costs.16 Another possible reason is that Chinese firms in the footwear and garment sectors can enjoy substantial tariff savings if they relocate their production lines to low-income developing countries that are eligible for preferential tariff schemes. These schemes include the US African Growth and Opportunity Act (AGOA), which provides for duty-free garment imports from many sub-Saharan African countries, and the EU’s Everything But Arms (EBA) for forty-nine least-developed countries (LDCs), which gives duty-free and quota-free access for all products except weapons.17 This allows for substantial price advantages in the US or EU markets for garments and footwear imported from these countries, compared with goods imported directly from China.18

Last but not least, the survey found that ODM firms were much more likely to establish production abroad than original brand manufacturing (OBM) firms. Nearly 14 per cent of ODM firms had already invested abroad compared with less than 4 per cent of OBM ones. The survey found that OBM firms had larger profit margins, which enabled them to pursue a diversification strategy. One example is the FIOCCO Group in the YRD region. According to a first-hand interview, the predecessor of the FIOCCO Group was established in 1992 as Huayi Fashion, a joint venture between a rural economic cooperative and a Taiwan company. After operating as an original equipment manufacturer (OEM) for about a decade, it started to establish its high-end women’s fashion brand in 2006. In response to the challenge of rising labour costs, the FIOCCO Group diversified by venturing into the international logistics business, while still maintaining its foreign trade assembly business in order to provide much-needed capital to develop its own brand.

Where, then, have the flying geese gone? A close look at the destinations of overseas direct investment by the light manufacturing firms surveyed reveals that China’s neighbours in South Asia and South-east Asia with low wages are the first to benefit from this potentially accelerating trend. Vietnam and Cambodia have been the most popular destinations. But it was reported during (p.274) the fieldwork that due to the relatively small labour pool, wages have been rising rapidly in South Asian and South-east Asian countries. For instance, the minimum wage rose from US$24 in 2009 to US$68 in 2013 in Bangladesh.19 A similar trend of rising minimum wages can be found in Vietnam: the minimum wage rose from US$51 in 2010 to US$174 in 2018 in Hanoi and Ho Chi Minh City.20 The average wage of garment factory workers rose from US$56 in 2010 to US$103 in 2017.21

Another prospect is that companies might be moving to Africa in search of lower wages. Indeed, the first pioneer wave of relocated Chinese plants can be seen in Ethiopia, for example, the Huajian shoe factory. The current labour force in sub-Saharan African countries is about 415 million, much larger than that of Vietnam and Cambodia combined (66 million).22 The labour force in sub-Saharan Africa is forecast to grow to over 600 million by 2030.23 While labour productivity is relatively low in Africa compared with that in China, it can be enhanced by providing training. Hence, Africa has a huge potential for undertaking labour-intensive light manufacturing.

In summary, rising labour costs are the most compelling challenge faced by Chinese light manufacturing firms. In response to this huge challenge, the majority of firms have chosen technology upgrading as the top strategy. But firms are more likely to become ‘flying geese’ if they are large foreign-owned footwear and garment firms engaging in ODM. While South-east Asian and South Asian countries are currently the most popular destinations for relocating Chinese light manufacturing firms, sub-Saharan African countries may become the next frontier as they possess abundant labour forces.

13.4 Flying Geese First Movers

While rising labour costs are the most severe challenge faced by Chinese light manufacturing firms, there are other significant challenges to investing outside China. These challenges are even more compelling for first movers venturing into a new destination, especially sub-Saharan African countries.

First movers have to overcome the fear of the unknown, which is exacerbated by information asymmetry. For most owners of Chinese light manufacturing firms, Africa is a remote continent afflicted with civil wars, infectious diseases, and macroeconomic instability. Although abundant young labour forces make (p.275) Africa a potentially attractive destination for relocation, the misperception of risks has discouraged light manufacturing firms from relocating their production capacity to Africa.

The first-mover challenge has been further aggravated by the poor soft and hard infrastructure in Africa. A salient symptom of underdevelopment is that institutions and policies are not conductive to the development of the private sector due to cumbersome red tape, poor administration capacity, and rampant corruption. For instance, many African countries rank very low in the World Bank’s Doing Business Indicators due to the poor business environment nationwide. Meanwhile, many African countries also suffer from infrastructure deficits making it difficult or prohibitive to transport goods to international markets, hindering the development of export-oriented manufacturing sectors.

One way to overcome the first-mover challenge is to attract anchor firms24 to provide a ‘demonstration effect’. An illustrative case is the pilot success of the Huajian Industrial Holding Company in Ethiopia. The company, which was established in 1996 with headquarters located in the city of Dongguan in Guangdong Province, specializes in high-end women’s shoes, producing over 20 million pairs of shoes a year for renowned international brands such as Guess, Marc Fisher, Coach, and Calvin Klein Nina.25

A key ingredient in the pilot success of the Huajian Industrial Holding Company is that the Ethiopian government has targeted light manufacturing sectors in line with its latent comparative advantages: abundant cheap labour and leather. The Ethiopian government has been actively deploying an industrial policy to support prioritized sectors through five-year development plans. It was with the launch of the Growth & Transformation Plan (GTP I) covering 2010/2011–2014/2015 that the government placed great emphasis on FDI and manufacturing exports, with a special focus on leather goods, textiles, and garments in order to build up foreign exchange and accelerate technology transfer (Federal Democratic Republic of Ethiopia, 2010).

Another key element of success is very proactive investment promotion by high-level political leaders. The World Bank’s Light Manufacturing in Africa project found that Ethiopia had factor-cost advantages in the shoe industry but suffered from binding constraints including backward infrastructure, poor business environment, and a lack of international buyer confidence in Ethiopia’s ability to deliver products of consistent quality in a timely fashion. To win the confidence of international buyers, it is crucial to attract FDI from (p.276) Chinese light manufacturing enterprises which already have a track record of success. The then chief economist at the World Bank, Professor Justin Lin, reported the findings to the late prime minister Meles Zenawi in March 2011 and suggested he come to China to personally invite shoe manufacturers to invest in Ethiopia’s Eastern Industrial Park. Prime Minister Zenawi took swift action, visiting the city of Dongguan in Guangdong Province in August 2011, once the frontier of mainland China that had seized the window of opportunity of industrial transfer from the East Asian ‘tigers’. At the invitation of Prime Minister Zenawi, Huajian visited Addis Ababa in October 2011 and decided to invest on the spot. To overcome the challenge of the lack of skilled labour, Huajian recruited eighty-six Ethiopian workers to be trained in China. Two production lines with 600 employees were set up in January 2012, and the first shipment was exported to the United States in March 2012. By May 2012 Huajian had become the largest shoe exporter in Ethiopia, and by December 2012 employment had expanded to 2,000 workers. Huajian’s exports comprised 57 per cent of Ethiopia’s total leather export in 2012. The number of jobs created by the Huajian shoe factory had risen to 3,500 by December 2013.

Apart from sensible sectoral targeting and proactive investment promotion, special economic zones (SEZs) act as a ‘nest’ for the pilot ‘bird’ of this leading Chinese shoe company. The first SEZ in Ethiopia, Eastern Industrial Park (EIP), was planned and constructed from 2007 and hosted its first firm, the Zhongshun Cement Company, in 2010 (Gakunu et al., 2015). Since then, the government has made substantial investments in improving both the infrastructure and institutional frameworks required to develop a national SEZ programme. The EIP is a private zone developed by Jiangsu Yongyuan Group—originally a Chinese steel pipe and aluminium producer. While the EIP suffered from some early problems which can be expected in a pilot project, it helped provide basic infrastructure to Chinese firms to make their relocation feasible.

The success of Huajian has had a snowball effect in attracting FDI to Ethiopia. The twenty-two factory units in Bole Lemi, a new industrial park, were leased out in just three months in 2013. The Ethiopian government’s proactive approach to attracting foreign direct investment bore further fruit. Phillips-Van Heusen Corporation (PVH), the second-largest apparel company in the world, chose Ethiopia as the base for its new business model of a fully vertically integrated, from ground to finished product, socially responsible supply chain. PVH came to lead a group of its top suppliers to build factories and a fabric mill in Ethiopia’s Hawassa Industrial Park (HIP). The construction of HIP started in July 2015 and the park was inaugurated on 13 July 2016. Within a year, on 4 March 2017, one of HIP’s tenants had exported HIP’s first dress shirt (Mihretu and Llobet, 2017). Ethiopia has shared its pioneer experiences with Rwanda and Senegal. Delegations from other African countries (p.277) have also visited Ethiopia to learn from its experience. In light of Ethiopia’s success, C&H Garments invested in the Kigali Special Economic Zone in February 2015 and production began within two months. Over five hundred jobs were created by August 2015, 300 women were trained in embroidery to enable household manufacturing, and employment reached 2,000 in 2017. In Senegal, the first SEZ was created in 2015 to attract FDI in light manufacturing and international buyers such as Carrefour. Success stories have sparked further high-level political commitment to achieve quick wins for pan-African industrialization (Hai and Xu, 2016).

13.5 Policy Recommendations

The potential for the relocation of Chinese light manufacturing capacity to Africa is huge and relocation is gaining pace, but it is not automatic.26 Unleashing this vast potential requires key stakeholders, especially host-country governments, to play an enabling and facilitating role. From the perspective of New Structural Economics (Lin, 2012a), economic structural transformation is achieved by creating synergies between an effective market and a facilitating government. New Structural Economics (NSE) as proposed by Professor Justin Yifu Lin applies a neoclassical approach to the study of economic structures and their evolution. NSE aims to address the limitations of traditional development thinking, including old structuralism with its overemphasis on state intervention and neoliberalism with its excessive focus on the free market. NSE is ‘new’ at least in two ways. First, it proposes that developing countries focus on what they can do well (latent comparative advantages) based on what they have (current factor endowments). In other words, it is an industrial policy that works with latent comparative advantages. It contrasts with ‘old’ industrial policies that failed, often because they involved supporting industries that were not going to be viable in the setting in which they were promoted. Second, it is new in the sense that it posits that a ‘facilitating state’ is necessary to provide the infrastructure and services needed by export industries, and that even in the poorest developing countries this is possible through cluster-based approaches in the form of industrial parks linked to ports. The ‘facilitating state’ is committed to generating a (p.278) dynamic capacity-development process that leads over the course of a generation to middle-income status, as has already been witnessed in recent history. The mainstream neoliberal framework does not provide for a facilitating government, hence the failure of neoliberal economists to predict or explain the Asian growth miracles.

In the case of today’s industrial transfer from China to Africa, while labour-intensive light manufacturing sectors align well with the latent comparative advantage of African countries, these sectors cannot become competitive advantages in the international market unless the government plays a crucial role in identifying and mitigating binding constraints.

The first enabling condition is that the host government can build SEZs, strategically utilizing limited resources to improve soft and hard infrastructure in a geographically demarcated area of a country beset with poor overall infrastructure and business environment. This approach can achieve quick wins by turning the country’s latent comparative advantages into competitive advantages and provides a demonstration effect to win the confidence of international investors and buyers. Yet SEZs often fail to live up to their initial expectations of helping African countries to kick-start economic structural transformation. There are at least four main reasons for these failures. First, SEZs have no sectoral targets or are too ambitious in targeting sectors beyond the country’s comparative advantages where factor costs are much higher than international competitors’, meaning they cannot compete in international markets. Second, lack of high-level political commitment makes it difficult, if not impossible, to put special policy incentives in place due to conflicts between zone authorities and line ministries. Third, basic connective infrastructure is missing so that firms face significant challenges such as electricity shortages. Last but not least, if zones are located in remote areas such as the hometowns of political leaders, export-oriented firms encounter much higher transport costs. Hence, host governments need to undertake a proactive learning process to fulfil the full potential of SEZs.

A second enabling element is that host African governments need to undertake proactive and targeted investment promotion. As shown in Section 13.4, the Ethiopian government has successfully managed to incentivize international firms to start investing in Ethiopia. This high-level commitment to supporting private-sector investment was reported to be a major driver of investment decisions, particularly among Chinese firms that are accustomed to collaborative relationships with local and national government. It is worth noting that not all African governments are ready to undertake proactive investment promotion as the Ethiopian government has done (Calabrese, Gelb, and Hou, 2017). Only those African governments that are ready to play a facilitating role in solving binding constraints faced by investors can successfully attract Chinese light manufacturing FDI. Furthermore, to (p.279) create quick wins, African governments can target investment promotion more effectively by attracting those Chinese light manufacturing firms that are most likely to make the relocation. Based on our survey findings, large foreign-owned footwear firms engaging in processing trade in the Pearl River Delta region could be the initial focus for targeted investment promotion.

A third recommendation is that development agencies can play a catalytic role in overcoming first-mover challenges. Private enterprises often tend to take a wait-and-see attitude when untested markets entail huge risks. One challenge is lack of basic infrastructure in SEZs, as host governments are often fiscally restrained and private capital suffers from short-termism. In such circumstances, development agencies can provide much-needed patient capital to build infrastructure so as to lay the foundation for the pending relocation of Chinese light manufacturing firms. Another challenge is high political risks and policy uncertainties. Development agencies such as the International Finance Corporation (IFC) can offer equity investment to help mitigate risks and build the confidence of pilot investors. A third challenge is information asymmetry exacerbating the fear of the unknown. Development agencies can act as honest brokers by providing neutral information to potential investors and disseminating the pilots’ success in an effort to attract a wider wave of investors. It is worth emphasizing that these types of incentive packages provided to first movers should include an exit clause under which special support should be phased out when pilot firms become economically viable after overcoming binding constraints. Meanwhile, it is necessary to collect first-hand information on the spillovers such as additional FDI, technology transfer, and labour productivity brought about by first movers in order to ensure that special support is justified by actual performance. In short, overcoming first-mover challenges can help to create a snowball effect in the future.

Last but not least, African governments need to play a proactive role in incentivizing foreign firms to provide on-the-job training. As discussed earlier, labour productivity is relatively low in Africa compared to China. African countries may be stuck in a predicament of low wages and low productivity, as foreign investors may not voluntarily provide training and simply take advantage of cheap labour to produce low-end products or segments while keeping the high-end ones in their home countries. As on-the-job training is one key avenue for creating spillovers from FDI in the local economy, African governments should proactively incentivize foreign investors to train local workers and upgrade value chains.

In summary, key stakeholders need to play an enabling and facilitating role in helping African countries to seize the window of opportunity of the pending relocation of Chinese light manufacturing firms.

(p.280) A final note of caution is that this window of opportunity may be closing if African countries do not act urgently. Two secular trends may risk the loss of such unprecedented opportunities for African countries. First, preferential trade agreements may be affected by huge political uncertainties which may discourage Chinese light manufacturers from relocating to African countries. For example, the Trump administration in the United States recently decided to suspend duty-free benefits for Rwandan textile imports.27 AGOA was enacted by the United States in the year 2000 under President Bill Clinton, but its current preferences and privileges may expire in 2026 if no further extension is authorized.28 Second, an overall trend towards automation in the manufacturing sector may result in fewer manual jobs for low-income countries, though there are limitations on fully applying automation in some light manufacturing sectors. In a nutshell, there is a much-needed sense of urgency for African countries to seize the window of opportunity presented by the unprecedented relocation of Chinese light manufacturing firms to promote their economic structural transformation.


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(1) United Nations, Sustainable Development Goals, https://www.un.org/sustainabledevelopment/sustainable-development-goals/, accessed 15 May 2017.

(2) African Union, Agenda 2063, https://au.int/en/agenda2063, accessed 15 May 2017.

(3) World Development Indicators.

(4) Akamatsu (1962) coined the term ‘flying geese’ to describe the relocation of manufacturing from Japan to other lower-income countries. Lin (2012b) uses the term ‘leading dragons’ to reflect the much larger size of relocation from China to other countries.

(5) China Bureau of Statistics, see http://data.stats.gov.cn, accessed 1 September 2018.

(6) For example, real wages in Ethiopia grew at an annual average rate of 3 per cent from 2005 to 2013 (based on International Labour Organization statistics). Yet due to limitations in data availability, the statement here can only be interpreted as a preliminary judgement.

(7) The main reason for firm compliance with time-consuming official approvals is to obtain a certificate of overseas investment that can then be used to purchase the foreign exchange required for the transaction. This is a product of controls on China’s capital account. Firms may reinvest their retained earnings offshore without repatriating them to China.

(8) Ministry of Commerce of the People’s Republic of China, Statistical Bulletin of China’s Outward Foreign Direct Investment, various years.

On average, inward FDI in Africa accounts for a small part of gross fixed capital formation at an average rate of around 11 per cent from 2015 to 2017. Source: UNCTAD, Country Fact Sheet: Africa, http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Regional-Factsheets.aspx, accessed 1 September 2018.

(9) An example of pilot firm-level efforts is the micro and small enterprises survey led by Professor Xiaobo Zhang at Peking University. But surveys on big export-oriented firms are scarce, as challenges such as access to firms are more compelling.

(10) In line with the official definition of the YRD and PRD, the following cities were selected: nine in the PRD—Guangzhou, Shenzhen, Zhuhai, Foshan, Jiangmen, Dongguan, Zhongshan, Huizhou, and Zhaoqing; and twelve in the YRD—Shanghai, Nanjing, Hangzhou, Ningbo, Zhoushan, Shaoxing, Huzhou, Jiaxing, Suzhou, Wuxi, Changzhou, and Nantong.

(11) Counties/districts within the two selected provinces, Guangdong and Zhejiang, were ranked in terms of the number of firms within each selected sector. A shortlist was constructed of counties/districts that cumulatively accounted for 30 per cent of the total number of firms in each sector in each province. Accordingly, we conducted our survey in a small number of cities: three cities (Guangzhou, Zhongshan, and Dongguan) in the PRD and one, Ningbo, in the YRD.

(12) The enterprise survey has been widely used in other studies (Brandt et al., 2014; Xu and Hubbard, 2018). It provides detailed financial information from the enterprises’ financial accounts, including total wages, assets, revenue, profit, and ownership, as well as data on their industrial sector and location. Data in the database come mainly from the quarterly and annual summary reports submitted by companies to their local Bureau of Statistics. The database includes basic information such as address and phone number, industry, type of ownership, affiliation, and year of starting operation. It also includes economic and financial information, such as number of employees, balance sheet, turnover, operating costs (including labour and intermediate input costs), profits earned, taxes paid, and exports. We focus on export-oriented firms whose export value accounts for over 50 per cent of total annual output.

(13) Casual observations suggest that a large proportion of labour-intensive factories originally from Hong Kong, Taiwan, and Korea have left China.

(14) The survey also under-reports opportunities for low-income, labour-abundant countries. If firms in China fail to cope with the challenge of rising wages by automation or relocation and close down, the market for their exports will be freed up for firms in other countries to fill as global buyers are looking for low-cost destinations to maximize their profits.

(15) As our survey shows that there may be variation in the relocation decision across different light manufacturing sub-sectors, the estimate here should not be interpreted as prediction but rather a hint for further investigation.

(16) For example, Huajian, the first footwear firm to relocate to Ethiopia in 2012, had its logistics costs increased from 2 per cent to 8 per cent of total costs but its labour costs reduced from about 25 per cent to 5 per cent, compared to the cost structure in China (based on an interview with the owner of Huajian Industrial Holding Company).

(17) ‘GSP+’ provides for zero tariffs for sixteen countries that have met certain human rights and labour rights standards.

(18) For example, non-silk knitted and crocheted headbands and ponytail holders (HTS No. 6117.80.85.00) are imported into the United States duty free if coming from AGOA countries, compared with a 14.6 per cent duty rate from China; sports footwear with leather uppers (HTS No. 6404.11.20) is duty free from AGOA countries but carries a 10.5 per cent rate if made in China; and footwear with a protective metal toe-cap (HTS No. 6401.10.00.00) avoids a 37.5 per cent tariff.

(19) Current prices, from International Labour Organization (ILO) Statistics.

(20) Current prices, from the official websites of the Ministry of Commerce and the Ministry of Human Resources and Social Security of the People’s Republic of China, as the ILO only provides data for 2014 and 2016.

(21) Current prices, from CEIC data.

(22) World Development Indicators.

(23) ILO statistics.

(24) Anchor firms are large and reputable international firms that lead their industries in terms of production processes and best practice. They can encourage other foreign investors to follow suit.

(25) ‘An Introduction to the Huajian Industrial Holding Company’, http://www.huajian.com/hjgk/hjjj.html, accessed 1 July 2018.

(26) Although Chinese labour-intensive firms may decide to close their operations instead of relocating to other low-wage countries in the face of rising wages, the market they used to serve will not disappear but is open to be filled by other suppliers. If African countries can attract the relocation of some Chinese firms, as long as they can use them as catalysts to enhance domestic labour-intensive firms’ capacity, improve logistics, and gain access to foreign buyers, they may be able to capture the market left by those firms that have closed in China and start a dynamic industrialization process.

(27) Sarah McGregor, ‘US Suspends Duty-Free Benefits for Rwandan Textile Imports’, 20 March 2018, https://agoa.info/news/article/15401-us-suspends-duty-free-benefits-for-rwandan-textile-imports.html, accessed 30 August 2018.

(28) AGOA FAQ, https://agoa.info/about-agoa/faq.html#what_is_AGOA, accessed 30 August 2018.