Sector Case Study: Apparel

Abstract

At the beginning of the 2000s, the introduction of the U.S. African Growth and Opportunity Act, combined with Multi-Fibre Arrangement quotas, contributed to a boom in foreign direct investment (FDI) in the Sub-Saharan African (SSA) apparel sector, leading to major growth in production, exports, and jobs. The possibility of exploiting the spillover potential of this FDI raised significant hopes of developing a locally embedded, competitive SSA apparel export industry. Yet more than a decade later, there has been very little progress made in reaching this objective, outside of Mauritius (and South Africa where FDI did not play a prominent role). Despite significant investments to attract FDI through building export processing zones and offering fiscal incentives, virtually no locally owned apparel firms are exporting or subcontracting, local value added remains low, local participation in management is limited, and domestic suppliers are almost absent in core and even most noncore inputs. This case study explores the level and nature of spillovers in three of the leading SSA apparel-exporting countries—Kenya, Lesotho, and Swaziland—and endeavors to understand the factors constraining them. We find across all countries FDI strategies that severely limit spillover potential from the start, including a concentration in low value–added activities, external control of sourcing, and reliance on expatriates in managerial and technical positions. This is aggravated by a weak domestic absorptive capacity (weak skills development, nonexisting or inadequate domestic training institutes), barriers in the domestic business climate, ineffective policies to support local small and medium enterprises, and a missing local entrepreneurial response. The Apparel Global Value Chain2 Introduction to the Apparel Global Value Chain Apparel is one of the largest export sectors in the world and has become one of the most globalized. In recent decades, developing countries have come to dominate world trade in the sector, expanding their share from around 25 percent in the 1960s to more than 80 percent today. Indeed, the apparel sector has long C h A p T e r 7 210 Sector Case Study: Apparel Making Foreign Direct Investment Work for Sub-Saharan Africa • http://dx.doi.org/10.1596/978-1-4648-0126-6 played a central role in the industrialization process of low-income countries (LICs), absorbing large numbers of unskilled, mostly female, workers and provided upgrading opportunities into higher value–added activities within and across sectors. As in many other sectors, production and trade in the apparel sector are organized in global value chains (GVCs) where production of components and assembly into final products is carried out via inter-firm networks on a global scale. To simplify the many activities in the chain, activities can be separated into the apparel supply chain and the apparel value chain. The supply chain focuses on the physical transformation and transportation of raw materials to final products, and the value chain focuses on activities that add economic value to products at each stage, but are not necessarily manufacturing or logistics related. Together, these make up the GVC for apparel. The apparel supply chain can be roughly divided into four stages that are intertwined with the textile sector (figure 7.1): (a) raw material supply, including natural (for example, cotton, wool, silk, and flax) and synthetic or man-made fibers (for example, polyester, nylon, and acrylic); (b) yarn and fabric production and finishing (for example, dying, printing, cutting); (c) production (for example, clothing, home furnishing, and industrial and technical products); and (d) distribution and sales at the wholesale and retail levels. A large part of apparel production—including cutting, sewing, and finishing activities—remains labor intensive, has low start-up and fixed costs, and requires simple technology. These characteristics have encouraged the move to low-cost locations, mainly in developing countries. In contrast, textile (yarn and Raw materials Research and development Design Production Logistics Marketing Services Value-adding activities Natural and synthetic fibers Apparel production Textiles Yarn and fabric production Supply chain Supporting environment Final products Distribution and sales Distribution and sales Market