Market or Investment

Why do foreign trade missions target Ethiopia?

Business investment forums provide an opportunity for foreign investors to visit Ethiopia in order to get a better sense of the potential economic opportunities in the country. Since the 2011/12 fiscal year alone, the country has hosted hundreds of delegations from countries like China, Turkey and India. Despite the promise of these forums in bringing investments to Ethiopia’s fledgling manufacturing sector, an ulterior motive exists for some companies: to use the events merely as an opportunity to market their goods. Still, the government thinks these forums prove fruitful, as even the marketing of goods can potentially lead to investment relations. EBR’s Fasika Tadesse spoke to government representatives and foreign investors to learn more about these forums and whether they are achieving their intended goals.

Julien Frederich came to Addis Ababa on November 18, 2015 from Belgium on behalf of Prayon S.A, a company that manufactures purified phosphate and fluoride used for food and industrial applications as well as fertilisers, toothpaste and pharmaceuticals.
During his four-day stay, Frederich, who is the Strategic Intelligence and Marketing Officer of Prayon, was investigating the potential of the country and finding a market for his company’s products. “Since Ethiopia is one of the fastest growing economies, my company wants to assess whether there is a market for Prayon’s products and to search for local companies that will be interested to partner [with us] in order to penetrate the market,” Frederich told EBR.
Prayon was one of the 52 Belgian companies that came to explore trade and investment opportunities. These businesses were among the 83 Belgian economic mission delegates that travelled to Ethiopia, Kenya and Rwanda.
In recent years, companies located in developed countries have been exploring Ethiopia to search for investment opportunities. Part of the driving force behind their interest is the country’s abundant and fast-growing population and decade-long double digit economic growth.
Hirut Zemene, Director General of the Business Diplomacy Directorate at the Ministry of Foreign Affairs (MoFA), testifies to this reality. “Ethiopia is grabbing the attention of many countries, so various companies…are visiting the country to seek [business] opportunities and we are using these occasions to persuade them to engage in investments,” she says.
The increasing number of foreign company representatives that visit Ethiopia is expected to extend a helping hand to the government in its attempt to transform the agrarian-based economy to one centred on manufacturing.
To facilitate this transition, the government introduced incentives to encourage foreign direct investment (FDI). According to data from the Ethiopian Investment Commission (EIC), between January 2011 and November 27, 2015, a total of 2,394 projects owned by foreigners were licensed in various sectors, of which 568 are operational, resulting in a combined capital of ETB32.4 billion.
The government’s urge to promote FDI is also driven by the amount of hard currency the country is spending to cover its mounting import bills every year, while the country’s export earnings fluctuate.
During the 2014/15 fiscal year Ethiopia obtained close to USD3 billion from export commodities, which is 60Pct of the government’s plan. On the other hand, it spent nearly USD15 billion to import various commodities, which are mostly capital goods. The resulting trade deficit is roughly -20Pct according to the International Monetary Fund, which is one of the highest in sub-Saharan Africa.
A deficit that large is due, in part, to the country’s lagging manufacturing and logistics sectors, resulting in poor export performance. Other factors include under production, lack of manufacturing inputs, and international price competition.
Because of this, the government considers FDI a major way to mitigate these problems and to increase local production capacity, which is expected to push export performance.
In order to facilitate this, the MoFA and the Ethiopian Chamber of Commerce and Sectoral Association (ECCSA) are working with different embassies and event organisers to arrange trade and investment forums, which help investors get more information about the country’s investment and business environment.
Melaku Juhar, founder and managing director of the International Business Networking Alliance (INalliance), an international consultancy firm working on business networking, explains the benefit of organising trade and investment forums. “Since Ethiopia is located in Africa, a continent known for political instability, the investors might not have confidence to invest in the country,” he says. “So the forums give them [a chance] to see the country’s situation and [economic] potential.”
Although official data is still being compiled, sources at the ECCSA say roughly 300-400 companies from 25 countries have visited Ethiopia annually since the 2011/12 fiscal year. Some countries, such as China, India and Turkey, even send delegations 2-5 times a year. During last fiscal year, Ethiopia took part in 36 business forums, of which 12 were out of the country, according to the MoFA.
Yet, despite the promise of business forums in attracting crucial FDI, the country is not benefiting as expected in terms of attracting investors. Rather, many foreign companies use the opportunity merely to find local agents who can import their products for sale in the country.
The delegates that visited from Belgium evince the tendency of foreign companies to use business forums to market their goods instead of investing. For instance, according to Frederich, Prayon is searching for companies in Ethiopia that are engaged in food processing, horticulture, and water treatment that could potentially use its products. In Frederich’s same delegation, Luc Van Looveren, a representative from the Antwerp Waasland Chamber of Commerce and Industry, was in Addis Ababa to approach local business partners and take contact information to the companies that did not get the chance to come to Ethiopia with them.
Data obtained from the Ministry of Trade (MoT) reveals the growing interest of Belgian companies to search for new markets in Ethiopia. As a result, the trade balance between the two countries favours Belgium. In 2014/15, Belgium earned USD198 million from exporting commodities to Ethiopia, while it spent USD53.1 million on Ethiopian products.
On the other hand, of the 2,394 foreign projects licensed during the past five years, Belgians have eight projects in total, of which five are operational.
The desire to market certain goods also informs the intentions of companies that visited Ethiopia from Jordan last month. “Our main target is to enter to the Ethiopian market by getting local partners that will distribute our products in Ethiopia,” testifies Mahmoud Alyous, General Manager of Design for Plastic Industries, a company that was established in 2004 and specialises in manufacturing plastic pipes for hot and cold water.
“Construction is booming in Ethiopia, so we know Ethiopia has a huge demand for our products, which attracted us,” says Mahmoud who was part of the Jordanian business delegation.
The group had 44 members representing 32 companies engaged in the manufacturing sector, such as pharmaceutical products, chemical, food supplies, and construction input materials, many of which hope to penetrate the Ethiopian market by supplying their products.
Although the trade balance between the two countries favours Ethiopia, data obtained from the EIC reveals the low level of investment interest of Jordanian companies in Ethiopia. Of the 2,394 licensed foreign investments during the past 5 years, only 16 projects are owned by Jordanian investors, of which three are operational.
The search for new markets even drives the interests of companies from Ethiopia’s largest trading partner, China. Just like Prayon and Design for Plastic Industries, Guangdong Food Industry Institute, a Chinese company, was seeking new markets in Ethiopia. The Institute was part of the 19 business delegates from China’s Guangdong province representing nine companies that visited Ethiopia in December 2015. The company was in search of a business partner to promote its brand and expand the market, according to Li Chunrog, Deputy Director of the Institute.
Unlike other foreign countries, China stands tall in terms of FDI in Ethiopia: they have 584 licensed projects, of which 177 are operational.
Despite China’s strong local presence, the trade balance between the two countries favours the East Asian nation. During the 2014/15 fiscal year China sold items worth USD5 billion to Ethiopia while it purchased items worth USD377.8 million from Ethiopia. This means Ethiopia’s export to China covers only 7.5Pct of its import from the Middle Kingdom.
The ever-growing interest to access the Ethiopian market by foreign companies instead of searching for investment opportunities is not lost on local officials. “Because Ethiopia [has] an open market economy, we cannot block foreign companies from selling their products here,” says Hirut.
Still, government representatives seem optimistic regarding the returns of these investment and business forums, even if they happen later than hoped. Hirut stresses that foreign companies’ presence in the area of trade is a start to a potentially long relationship that leads to investment.
According to Fitsum Arega, Commissioner of the EIC, investors generally won’t invest in a new country without knowing it well, so they asses the market first and establish a relationship through a trade partnership until they reach a final decision – a trend he says is common globally.
Melaku of INalliance, who also worked as the Trade and Investment Director at the ECCSA for four years, elaborates on Fitsum’s comments, stating that investment always starts with trade. When foreign companies sell their products locally they are learning the system of the country, such as the logistics, bureaucracy, the market and the tax systems. He recommends that local businesspeople should be active enough to approach and convince the foreign companies to partner with them for investment opportunities.
Melaku says the main thing the government should do to increase investment is by streamlining the bureaucratic bottlenecks that foreign investors face at government offices.
Fistum is also optimistic about the interest of foreign investors to sell products in Ethiopia. “They will supply products that are not produced locally at competitive prices and also they will give the people a variety of products,” he argues. “We observed many companies that came for the first time are not investing in Ethiopia. And also when we see the existing foreign companies in Ethiopia it took them five to six years to set up their factories.”
Hirut validates Fitsum’s argument. “When we see Unliver’s case, they provided household supplies to Ethiopia for a long time before they invested in the country,” she says.
To encourage foreign companies to transform from trading to investment, the MoFA conducts follow-up on the companies that visited Ethiopia through the missions in their respective embassies in addition to facilitating the forums and assisting the companies in learning the business environment of the country. “From last year’s delegation that came from South Africa and Turkey, five of them are in the pipeline to launch their projects after getting licenses,” says Hirut.
Although a significant number of foreign companies are seeking to sell their products in Ethiopia, there are also some that come to eye investment opportunities.
One such company is Guangdong Textile Import and Export, which already has a presence in Ethiopia, supplying garment, fabric, and cotton for the companies that reside in the Eastern Indusial Zone.
In stating his company’s plans, Andy Yang, Chief Executive Officer of the state-owned enterprise, expresses what the government hopes will be a future trend resulting from these business forums: “We are here to discuss with the government of Ethiopia to establish an industrial zone to relocate factories and source textile products from Ethiopia.” EBR