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Johannesburg - South Africa is not benefiting from "global value chains", but Walmart's acquisition of Massmart Holdings [JSE:MSM] offers some hope, Professor Stephen Gelb of the University of Johannesburg said on Tuesday.
"South Africa is not part of these global value chains which... are becoming a more important share of the global economy," Gelb told reporters during the release of the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2011.
According to the report international production is not only about foreign direct investment and trade.
It is also about "non-equity modalities" which are defined as those areas where trans-national corporations have a material impact on businesses they do not own.
The major player in non-equity modalities is contract manufacturing or outsourcing, where a local company is contracted to produce goods that meet a trans-national corporation's specifications.
This accounted for between $1.1 trillion and $1.3 trillion in sales globally in 2010.
It was followed by franchising with $330bn to $350bn, licensing with $340bn to $360bn, and management contracts, particularly in the tourism industry, with around $100bn in sales in 2010.
UNCTAD said non-equity modalities can yield development benefits of up to 15% of gross domestic product (GDP) in some economies.
South Africa had not been benefiting from this, which was worrying, said Gelb.
FDI into SA falling
The report found that South Africa's share of foreign direct investment fell 70% between 2009 and 2010.
The only sector in South Africa with any share in the global value chain was the auto industry, he said.
However, US retail giant Walmart's acquisition of 51% of local retailer Massmart, which has drawn criticism for its perceived threat to local procurement if it cut prices, should rather be looked at in terms of "non-equity modalities", Gelb said.
"Walmart operates massive networks internationally... entry into South Africa will provide opportunities to South African firms to get into Walmart's chains internationally."
South African manufacturers would have opportunities to supply internationally while benefiting from skills transfers and developing technology.
He gave the example of Lonrho's seafood division, Oceanfresh, which said on Monday it would supply hake fillets to Walmart stores in the US from October.
"This report... points to long-term growth gains to local firms being part of these (Walmart) networks," Gelb said.
He suggested South Africa should be looking for similar opportunities in other areas, such as the labour-intensive garment industry.
US clothing company Gap, for example, sourced only 4% of its products from Africa. None of those were made in South Africa, which could be an opportunity.
South Africa should be exploring the potential Walmart provides to local companies to get into the global market, instead of looking at Walmart's plans for pricing and sales in South Africa.
"We should be looking at opening up to the world," he said.
The government has applied to the Competition Appeal Court to review the Competition Tribunal's decision to allow Walmart's deal with Massmart to go ahead with conditions.
It had argued there was a "substantial public interest concern" in the merger, among these that it might lead to job losses.
According to the UNCTAD report, non-equity modalities employ around 18 to 21 million workers worldwide, most of them in developing economies. They have a major impact on job creation. According to the report however, they often involve poor working conditions and lack job security.
"Although jobs are created, the contribution to GDP is not significant," Gelb added.
"... but getting into value chains is an entry ticket to the global economy."
These modes can foster local entrepreneurship and investment in productive assets. A concern is that these modes can be used to circumvent social and environmental standards.
According to the report developing countries need to beware of remaining locked into low value-add activities and over-dependence on foreign technologies and inputs. Countries need to have policies in place to maximise the development benefits of non-equity modalities networks and minimise risks.
"South Africa is not part of these global value chains which... are becoming a more important share of the global economy," Gelb told reporters during the release of the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2011.
According to the report international production is not only about foreign direct investment and trade.
It is also about "non-equity modalities" which are defined as those areas where trans-national corporations have a material impact on businesses they do not own.
The major player in non-equity modalities is contract manufacturing or outsourcing, where a local company is contracted to produce goods that meet a trans-national corporation's specifications.
This accounted for between $1.1 trillion and $1.3 trillion in sales globally in 2010.
It was followed by franchising with $330bn to $350bn, licensing with $340bn to $360bn, and management contracts, particularly in the tourism industry, with around $100bn in sales in 2010.
UNCTAD said non-equity modalities can yield development benefits of up to 15% of gross domestic product (GDP) in some economies.
South Africa had not been benefiting from this, which was worrying, said Gelb.
FDI into SA falling
The report found that South Africa's share of foreign direct investment fell 70% between 2009 and 2010.
The only sector in South Africa with any share in the global value chain was the auto industry, he said.
However, US retail giant Walmart's acquisition of 51% of local retailer Massmart, which has drawn criticism for its perceived threat to local procurement if it cut prices, should rather be looked at in terms of "non-equity modalities", Gelb said.
"Walmart operates massive networks internationally... entry into South Africa will provide opportunities to South African firms to get into Walmart's chains internationally."
South African manufacturers would have opportunities to supply internationally while benefiting from skills transfers and developing technology.
He gave the example of Lonrho's seafood division, Oceanfresh, which said on Monday it would supply hake fillets to Walmart stores in the US from October.
"This report... points to long-term growth gains to local firms being part of these (Walmart) networks," Gelb said.
He suggested South Africa should be looking for similar opportunities in other areas, such as the labour-intensive garment industry.
US clothing company Gap, for example, sourced only 4% of its products from Africa. None of those were made in South Africa, which could be an opportunity.
South Africa should be exploring the potential Walmart provides to local companies to get into the global market, instead of looking at Walmart's plans for pricing and sales in South Africa.
"We should be looking at opening up to the world," he said.
The government has applied to the Competition Appeal Court to review the Competition Tribunal's decision to allow Walmart's deal with Massmart to go ahead with conditions.
It had argued there was a "substantial public interest concern" in the merger, among these that it might lead to job losses.
According to the UNCTAD report, non-equity modalities employ around 18 to 21 million workers worldwide, most of them in developing economies. They have a major impact on job creation. According to the report however, they often involve poor working conditions and lack job security.
"Although jobs are created, the contribution to GDP is not significant," Gelb added.
"... but getting into value chains is an entry ticket to the global economy."
These modes can foster local entrepreneurship and investment in productive assets. A concern is that these modes can be used to circumvent social and environmental standards.
According to the report developing countries need to beware of remaining locked into low value-add activities and over-dependence on foreign technologies and inputs. Countries need to have policies in place to maximise the development benefits of non-equity modalities networks and minimise risks.
