This discussion evaluates mostly China-side factors that may induce a transmigration of labour-intensive factories, specifically to the sub-Saharan region. Judging from Asia’s FG model, three factors are the crucial inducements for FDI in low-end manufacturing: (1) labour costs; (2) exchange rates; and (3) institutions.

Successful catch-up growth necessarily leads to a rapid rise in wages, rendering labour intensive exports uncompetitive. But how fast wages rise depends on the size of rural labour reserves that need to be shifted to industry. In this respect, unlike Japan and the newly industrialised economies (NIEs) that had a relatively limited reserve of rural labour because of their small geographical size, China has a massive rural labour force yet to be tapped. Seven hundred and fifty million people still live in China’s countryside with the average rural income only one-third of their urban counterparts. Still, the recent labour unrest and the sharp wage hikes in the coastal provinces will prompt a shift of factory jobs elsewhere. Here, China’s present income-doubling plan (by 2020) for its rural regions will promote intra-country industrial migration. Thus, China’s own vast interior seems more attractive as new production sites than any faraway countries.

Currency appreciation in effect ‘taxes’ exports but ‘subsidises’ outward FDI and imports. Japan and the NIEs submitted to swift and sharp rises in their currencies as they succeeded in catch-up growth. True, the yuan has considerably appreciated over recent years — but only slowly and not drastically enough to trigger a massive relocation of labour-intensive manufacturing overseas — largely because China is not quite ready to dismantle labour-intensive industries that still provide much needed jobs at home. This gradual pace of appreciation gives exporters more time to raise productivity or to relocate inland, thereby allowing them to hang on a while.

Institutional factors weigh on both sides. Infrastructural deficiencies (for example, unreliable power and water supply, transportation, communication, poor governance, inhospitable regulatory environments, work ethic) in Africa are well known. This explains why foreign multinational enterprises in general, let alone China’s, have not yet seriously advanced into the continent in search of low cost labour. The governments of the Asian NIEs quickly realised the potential of Japanese and Western FDI and thus were prepared to provide relevant infrastructure, particularly special economic zones (SEZs).

Since 2006, as part of its strategy to assist sub-Saharan Africa in attracting manufacturing, China has been helping establish SEZs, a scheme modelled on its own SEZs. Currently, the Chinese SEZ in Zambia serves as a model for such zones in Africa. At the moment there exists China’s tendency toward ethnicity bound groupism, as evidenced in the employment of Chinese construction workers in large numbers for aid projects, the settlement of Chinese migrants and petty merchants/caterers in host countries and the one sided presence of Chinese consortia for overseas investments without much participation of local and other countries’ MNEs.

In contrast, Asia’s SEZs succeeded in hosting not only foreign MNEs but many local firms as well, and host governments took proactive measures to use their SEZs as a learning conduit for modern technology and advanced business practices, a situation not yet commonly observable in sub-Saharan Africa. Lest China sponsored SEZs that are presently in the early stages of development turn into ‘industrial Chinese diasporas,’ so to speak, they would need multi-national participation, especially by African manufacturers themselves. South African MNEs, in particular, ought to participate in such zones. Recently, the International Finance Corporation decided to fund US$10 million as a joint financier of a commercial complex project (worth about US$33 million) in Tanzania with a Chinese company and a local non-profit organisation, inviting a third party to fund an additional US$6.5 million — an arrangement designed to encourage multi-national participation and adherence to internationally acceptable social and environmental standards.

In addition, the New Partnership for Africa’s Development (NEPAD)-OECD Africa Investment Initiative aims to strengthen the capacity of African countries to design and implement reforms that improve their business climate and to unlock investment potential in the continent. Also, the US’s African Growth and Opportunity Act (AGOA) may nudge China to invest more in democratic and market based economies.

Though China may be serious about relocating low-cost factories to sub-Saharan Africa, there are hurdles to clear on both sides. In the near term, China still can relocate labour-intensive manufacturing inland or to its low-cost neighbours, and sub-Saharan Africa itself is institutionally not quite ready to host labour-seeking FDI on a scale substantial enough to spark catch-up industrialisation, flying-geese style, as has happened in Asia.

Terutomo Ozawa is Professor Emeritus of Economics, Colorado State University and Research Associate at the Center on Japanese Economy and Business in the Graduate School of Business at Columbia University. Christian Bellak is an Associate Professor of Economics in the Department of Economics in the University of Economics and Business, Vienna. This essay is a chapter from the Vale Center publication, ‘FDI Perspectives: Issues in International Investment.’ The full publication can be found here.