The African Continental Free Trade Agreement- an update and reflections on a future EU-Africa Partnership
May 6, 2020
Global Value Chains and SMEs in the digital economy: what role in the EU-Africa relation?

The EU is by far the largest partner of the African continent both in terms of trade in goods and Foreign Direct Investments (FDI). But in today’s world economy, production is organized in complex webs of transactions in which goods and services cross several borders before being sold as a final product. Such networks have been labelled as Global Value Chains (GVCs), and a proper understanding of the EU-Africa economic relations cannot ignore their role. This study reviews the position of African countries in GVCs including the role of SMEs and digital technologies.

Global Value Chains and the EU-Africa relation

Within GVCs firms do not need to be responsible for the whole range of activities but they can specialize in a narrow niche of tasks, sometimes relatively simple, or more complex and sophisticated. This increases the possibility also for firms in developing countries to find their role in such GVCs and has offered opportunities for development in many countries.

In general, firms can participate in GVCs by sourcing inputs from foreign suppliers (backward integration) or by providing inputs into their foreign customers production (forward participation). Firms can also participate in GVCs without engaging internationally by buying from or selling to domestic counterparts with international connections.

This organization of production gives rise to an intense flow of international trade in intermediate goods and services, which allows us to use global input-output tables to estimate the position of countries in such GVCs. These data reveal:

  • That more than two-thirds of world trade occurs through GVCs, out of which the African share has risen by almost 60 percent since 1995 and now makes up 2.2 percent.
  • Forward integration accounts for 60 percent of its participation in GVCs, but backward integration has been growing faster.
  • The continent’s participation in GVCs is led by Northern and Southern Africa, which account for almost 80 percent but participation rates vary a lot across countries.
  • The intra-African GVC integration is low reaching only 6 and 12 percent of forward and backward integration, respectively.
  • Europe is the main partner for African participation into GVCs, absorbing almost two-thirds of its forward and 40 percent of its backward integration.

This shows that the EU enjoys a privileged position in GVC participation with Africa, due to a combination of geographical, cultural, historical and policy related factors, which deserves to be leveraged with further policy actions.

Global Value Chains and SMEs

Small and medium sized enterprises (SMEs) are key to the growth of many countries, including in Africa. Considering the potential positive effects that GVCs can bring in terms of economic development and the relevance of SMEs, it is worth considering how to these firms can fit into GVCs. However, firm-level evidence suggests that direct SME participation in GVCs is still limited compared to larger firms. This is mainly due to the existence of fixed costs in entering such relationships with foreign buyers or suppliers requiring minimum levels of productivity and quality standards, knowledge of foreign markets, trade regulations and border procedures, as well as physical and digital infrastructure. These requirements are less stringent when GVC participation is indirect, hence SMEs tend to supply and/or source from local firms, which sometimes are affiliates of foreign MNEs located in the SME country.

Digital technologies and SMEs participation in GVCs

Digital technologies can provide new opportunities for SMEs participation in GVCs, making it easier to access international markets as well as reducing some of the costs. For example:

  • Online sales platforms allow better access to international markets and supply chains
  • Digital technologies can lower the cost of some business activities, such as log-distance communication, real-time translation, or market research.
  • Digital logistics can reduce costs in distribution activities, allowing firms to track inventory shipments and better assess their demand
  • Firm’s expenses on ICT infrastructure can be reduced by exploiting available cloud technologies

Nevertheless, these benefits from digital technologies are not without challenges. The lower availability and bandwidth of broadband connection in developing countries reflects into reduced accessibility to the internet, and a gap in technical skills related to the use of the internet and related technologies. Sadly, failing to invest in the necessary skills and technologies will hinder SMEs opportunities to participate to and benefit from GVCs.

Conclusions

This study bears important implication for the policy discourse and for the design of a new partnership between the EU and the African Continent.

First, geographic and cultural proximity create the perfect conditions for a natural and potentially mutually beneficial integration of the EU and Africa into GVC.

Second, participation in GVCs highlights more than ever the importance of bilateral trade liberalization and economic integration. In order to be able to participate and benefit from in GVCs, countries need to make trade as frictionless as possible among them.

Third, the rise of digital technologies has opened new opportunities for SMEs. Nevertheless, governments need to provide the business sector with an affordable and high-quality internet infrastructure and businesses need to be aware of the opportunities opened by the digital economy.

Fourth, policy measures from trade policy, quality of logistics infrastructure and the general business environment can play a key role in facilitating participation of African firms in GVCs, especially SMEs.

Davide Castellani

Professor Henley Business School