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Can Chinese Special Economic Zones revitalise Nigeria’s manufacturing industry?

Nwamaka Ogbonna
By Nwamaka Ogbonna

Nwamaka Chidera Ogbonna is a Dphil candidate in International Development at the University of Oxford. Her research focuses on understanding the nature of learning, innovation and technological capability development within technology clusters and Special Economic Zones (SEZs) in Nigeria.

Posted on Tuesday, 23 March 2021 15:39

Chinese State Councilor and Foreign Minister Wang Yi (L) meets with Nigerian Foreign Affairs Minister Geoffrey Onyeama in Abuja, Nigeria, on 5 January 2021. (Photo by Jiang Xuan/Xinhua)

In February 2021, Nigeria commemorated 50 years of establishing official diplomatic relations with China.

Within this period, the economic engagements between the two countries have grown significantly from the first wave of Hong Kong Chinese investments in the 1960s to a situation where there are approximately 1000 Chinese firms currently operating in the country.

As part of this deepening engagement, Nigeria was selected, in 2006, to host two of the first six Special Economic Zones (SEZs) that the Chinese government committed to developing in Africa – the Lekki Free Trade Zone (LFTZ) and the Ogun Guangdong Free Trade Zone (OGFTZ). Given the role which SEZs played in China’s industrialisation, this was seen by the Chinese as a way of lending their industrial expertise to Nigeria.

SEZs appeal to governments with limited resources, as it allows them to attract Foreign Direct Investments (FDI) by addressing infrastructure and investment climate issues within a delimited geographical area rather than attempting to do so across the entire country.

Additionally, it is believed that providing fiscal incentives such as import duty waivers, tax concessions and streamlining bureaucratic processes in these SEZs shall encourage the inflow of FDI which can be a source of knowledge spillovers, job creation and revenue generation.

Therefore, Nigerian policymakers hoped that among other things, these SEZs could support the resuscitation of Nigeria’s comatose manufacturing sector.

Indeed, SEZs can support domestic manufacturing when firms within them develop backward linkages with domestic firms. These linkages include purchasing inputs from them or subcontracting activities to them.

It is believed that repeated and constant interactions with these SEZ firms will expose domestic manufacturers to higher quality requirements thereby incentivising them to invest in more sophisticated technologies and management practices. More than a decade after, it is not clear that these objectives have been achieved, therefore it is important to understand why.

Chinese industrial enclaves in Nigerian cities

Chinese firms make up at least 80% of the firms in both SEZs and they are predominantly involved in the assembly of already manufactured production parts from China.

As these production parts are imported from China, it means that there are limited opportunities for domestic firms to supply them with inputs, thereby undermining any possibilities for significant backward linkages to emerge.

Thus, the engagements which domestic firms have with Chinese SEZ firms are often restricted to non-core, low value adding activities such as the provision of packaging or transport services. As these are not the core competencies of the SEZ firms, there is little or no knowledge transfer to the domestic firms.

One of the reasons why these Chinese firms import production parts is because, in many of the industries in which they operate, they cannot find domestic manufacturers who can provide them with inputs to the quality and scale which they require.

Truck assembly, for instance, involves a variety of inputs such as breaks, headlamps, air conditioning units, radiator, mirrors, windshield, bumper etc. However, the metals and machines which are needed to manufacture these parts account for 34% of Nigeria’s total imports.

Evidence of linkages

The only industries where there has been evidence of linkages are in the manufacturing of things like ceramics or insecticides which involves the use of raw materials like kerosene and kaolin which Nigeria has in abundance.

Still, local manufacturers are unable to capture full value as these inputs are supplied to foreign firms in raw material form without any additional processing thereby reducing the depth of linkages that can be formed.

In fact, to encourage these SEZ firms to source inputs locally, the Nigerian Exports Processing Zones Authority (NEPZA) requires SEZ firms to commit to 35% local content in their production or their applications to set up their firms would not be granted.

The LFTZ also provides them with discounts on land price and management fees if they have evidence of sourcing inputs locally. Still, none of this has made any significant impact on the volume of inputs that they source locally. What this implies is that, for SEZs to catalyse domestic manufacturing, it is not simply enough to provide foreign investors with generous incentives; there must be commensurate efforts to develop the manufacturing capabilities of local firms. Linkages will not magically appear in the absence of strong indigenous capabilities.

The importance of investing in domestic manufacturing capabilities cannot be overstated. Many countries that have been successful with SEZs have used fiscal incentives to encourage SEZ firms to invest in the development of the capabilities of local suppliers or subcontractors as this enables the development of linkages.

However, in Nigeria’s case, some of the incentives provided actually undermine the development of linkages. For instance, the duty-free concessions that SEZ firms enjoy means that they can bring in raw materials or production parts free of duty and only pay duty when the goods are moving into the rest of the country.

Therefore, rather than import freezers, for instance, they import its various parts such as the baskets, compressors etc. and assemble them within the SEZs for sale in the domestic markets. Thus, for many Chinese firms, these SEZ firms are simply a cheaper way to import goods into the countries as they avoid paying higher duties.

Moreover, many of the Chinese firms in the SEZs are hardly large players in their markets; they are mostly SMEs with little sophistication and international experience needed to make substantive investments in the capabilities of domestic manufacturers.

A lack of strategic approach

The failure of these SEZs to support domestic manufacturing is a reflection of a lack of strategic approach in Nigeria’s SEZ project.

While SEZs have been identified in the Economic Recovery and Growth Plan (ERGP) as a pillar of Nigeria’s industrialisation programme, there have been little efforts to connect them with Nigeria’s wider industrial goals. The ERGP, for instance, identifies agribusiness and agro-allied; solid minerals and metals construction etc. as the government’s priority sectors; however, the activities of the 14 operational firms within the LFTZ, for example, show that there are only a few investments within those sectors.

In many ways, Nigeria has adopted a ‘Build it and they will come approach’; in that they build these zones before identifying the needs of investors. Consequently, there have been little investments into developing the local value chains and the sort of linkages that will ensure that domestic firms can derive value from their engagements with SEZ firms.

A direct outcome of this is that while policymakers hope that foreign firms investing in these SEZs can use them as exports platforms thereby supporting the country’s exports diversification agenda, the motivation of the Chinese actors could not be more at odds.

The development of Chinese SEZs in Africa started in 2006 was part of the Chinese government’s domestic restructuring plan, which involved the offshoring of low-technology aspects of the value chain abroad to developing countries, while focusing on more technology-intensive, higher value adding activities at home. It was also part of the government’s plan to encourage the internationalisation of Chinese SMEs so that they can gain experience and exposure.

Therefore, the primary motive for these firms to establish in Nigeria was to capture the country’s domestic market, not to use the country as an export platform; in fact, none of the firms at the LFTZ, for instance, exports from Nigeria. They argue that infrastructure issues, poor ease of doing business even within the zone and shortage of qualified skills mean that it remains relatively easier for them to export from a place like Vietnam, for instance, than from Nigeria.

A more mutually beneficial relationship

The poor performance of these SEZs feeds into the existing sentiments of those who feel that the China-Nigeria relations have not been beneficial to Nigeria. But given that these SEZs are relatively young, there remain significant opportunities for improvement.

There needs to be a more proactive approach by the Nigerian side to attract the sort of Chinese FDI aligned with the country’s economic priorities.

All FDI is not equal, therefore SEZ incentives need to be deployed more strategically to attract FDI that is more likely to utilise local inputs and invest in the development of the capabilities of domestic manufacturers, for instance, through supplier training programmes.

Project MINE was an attempt to attract Chinese manufacturers who were global value chain leaders, however since the departure of the former Minister of Industry, Trade and Investment – Okechukwu Enelamah, little has been heard about it.

Furthermore, greater investments need to be made in the development of relevant value chains in the manufacturing sector as this is one of the factors which undermine the development of linkages. For example, in areas where Nigeria has a comparative advantage such as ceramic manufacturing, efforts should be made to support domestic manufacturers to increase the value addition thereby deepening the linkages.

Bottom line

SEZs transformed Chinese cities like Shenzhen into a hub of industrial activities. And if properly implemented, they can do so in Lagos and Ogun too.

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