CHAPTER 1. INTRODUCTION1.
1 BackgroundThis study focuses on the role of Foreign Direct Investment in Gabon manufacturing industry development, particularly on industrial wood production. Located on the Gulf of Guinea along the Atlantic coast, Gabon’s forestry has been one of the most important traditional export commodities and the center of attraction for foreign investment. Gabon is one of the smallest and least populous countries -in Africa, hence, retains a large area of the African rainforest. -majority of the population thus 1.5 million are live in the urban centers (in the capital of Libreville), this accounts for approximately 85 of the forest area being preserved. Deforestation rates are around 0.1% annually, out of the 22-23 million hectares of forest area, about 4 million are protected areas and 14 million are allocated for forestry . In fact, Gabon’s forests are part of the second largest tropical ecosystem after the Amazon, namely the Congo Basin, which covers 1.
8m square kilometers. Gabon possesses around 23 million hectares of forests, which cover nearly 85% of its total land area, which makes it the second country with the heaviest forest region in Africa. The wood industry plays a dominant role in today’s economy.
Usually, it is considered the private economic sector consisting of wood industry and lumber industry. For instant, furniture; wood pulp and the paper industry are secondary products produced within the wood industry. Despite the discovery of oil and the wealth that comes with it, majority of the citizens in Gabon are still live in poverty. Upon even the discovery of oil, timber export has been a large contributor the economy; in the 1990’s Gabon became reliant on export markets in China and East Asia but was hit hard by the Asian economic crisis of 1997.
Gabon’s forestry sector barely affected during the economic crisis of 2008 compared to other countries in the region due to the strong demand for Okoumé wood in emerging markets. In 2010, Gabon banned log exports in an attempt to promote value-added log processing. Although log processing has increased, the ban it boosted raw log export in Republic of Congo and Cameroon. Forest conservation in Gabon was acknowledged in 1999-2000 by the “Megatransect (link is external)” expedition by Michael Fay of the Wildlife Conservation Society, after the biologist hiked through hundreds of miles of Congo basin rainforest to survey plants and attract attention to the conservation value of the region.
Gabon, continue to export the dominant share of its forest resources in unprocessed form. In 2008, logs made up 88% of Gabon’s total export volume of all forest products measured in round wood equivalent volumes.In the past decades, Gabon’s wood production and export statistics revealed that the industry lacked diversification because it relied heavily on single timber specie (Okoumé) and exported the majority of its logs abroad, particularly to Asia and European markets. Gabon produces insignificant volumes of secondary wood products (not captured by the available data) and relatively small volumes of primary wood products. Several research conducted have shown that the rainforest is located mostly in five regions, namely; in the Amazon Basin, Central Africa, Canada, Southeast Asia, and Russia. Global production of all major wood products grew six consecutive times in 2015, while trade in wood products decreased slightly: according to new data published by Food and Agricultural Organization (FAO) nowadays. The increase was mainly boosted by the continuous economic growth in Asia, a recovering housing market in North America and scaling up of the bioenergy targets.
In addition, in 2015, growth in the production volume of wood products ranged between one and eight percent (according to the FAO data unveiled today). At the same time, global trade value in primary wood and paper products shrinked slightly from $267 billion in 2014 to $236 billion in 2015 due to lower prices for wood products. Production of forest products has been good for the wood industry in Asia-Pacific and North America due to a growing housing market.The dominant log producing countries now have also become the major consumer of their output, i.e. logs are the input for domestic primary wood processing industries for producing sawn wood, veneer sheets, plywood, and boards.
In aggregate, 99% in South America and 90% in Asia-Pacific region of all logs a converted into primary products. In ‘tropical’ Africa the rate of domestic conversion is lower and fell from 82.2% in 2006 to 80.5% in 2007. 1.2 Literature ReviewThe area of study in this thesis is actually concentered on two parts of international business: foreign direct investment and timber industry.
The research investigates and analyzes timber industry performance through foreign direct investment theories. The relationship between FDI and industry process requires in the first place a theoretical overview introduced by some scholars. In addition, it highlights the differences of opinion on foreign direct investment and finally presents empirical studies in regards the impact of FDI on timber industry. 1.2.1 Theoretical OverviewAfter the Second World War, Foreign Direct Investment (FDI) has gained a significant role in the international business . Several theories have been propounded to enlighten the motivations and reasons that leads foreign companies to invest abroad. Theories on FDI focused on the main theories of FDI known: the Neo-classical Economic Theory of FDI, eclectic paradigm (Oli-Model) as well as motive behind theories.
1.2.1.1 The Neo-classical Economic Theory of FDIIt has been the claim that, “FDI positively contributes to the economic development of the host country and increases the level of public welfare” (Horst, Bergten ; Moran, 1978). According to these economists, foreign companies are engines of economic growth of host countries. On another hand, they invest their capital in order to support foreign economies.
Some researchers have supported the view that, FDI did not only bring high-tech but also market information, managerial acknowledge, marketing skills and human capital efficiency (Kojima, 1978).Some supporters of neoclassical economic theory confirmed that, inflow of capital from multinational companies (MNCs) and its reinvestments of profits increase the total savings of the country, increases government’s revenue via tax and other payments . According to Sornarajah (1994) and kenedy (1992) foreign direct investment supported improvement in the local infrastructure facilities, which resulted in economic development, and accelerated the economic growth by increasing the administrative, technical and managerial capabilities of host country.1.2.
1.2 Eclectic Paradigm (Oli- Model)British economist John Dunning (1993), known via her famous OLI paradigm theory in international trade. Dunning demonstrated through his theory that “investors choose FDI because of three determinant areas: O – ownership, L – location, and I – internalization advantages”. His theory is also known as the OIL-Model, According to Dunning (1993), some companies, in order to maintain the existing market, are driven to internationalize for the fear of losing their national market for failure of not discovering a new market. The author argues that these types of firms practice a defensive strategy, that is, they are more interested and ready to enter a foreign market just for the benefit of the existing market. FDI decides to move and settle abroad after conducting a survey of home market resource investments, hoping to further increase the profitability of their business supports John Dunning in the same year. The author has identified resource research, efficiency research and market research as the most common motivations that can convince foreign businesses to invest their capital in a foreign economy.The eclectic theory developed by professor Dunning is a mix of three different theories of direct foreign investments (O-L-I): 1) “O” from Ownership advantages:The author highlighted that ownership advantages reveal every company’s desire to successfully enter a foreign market on lower marginal cost than other competitors as well as exclusive processing of their enterprise and transfer at lower cost.
Thereby, FDI seek to triumph over operating costs in a foreign market by possessing certain characteristics. This refers to the specific benefits the company seeks to obtain categorized into three. Dunning (1973, 1980 and 1988) introduced three types of specific advantages: a) Monopoly advantages in the form of privileged access to markets through ownership of limited resources, patents, trademarks;b) Technology, knowledge broadly defined to contain all forms of innovation activitiesc) Economies of large size such as economies of learning, economies of scale and scope, greater access to financial capital;2) “L” from Location:Location advantages are centered on internationalized decision of companies. In fact, OLI is a second process which usually follows after the first condition (ownership advantages) fulfilled, a foreign company must figure out the appropriate location advantages. These advantages are the key factors to determine which activities of the transnational corporation according to John Dunning. will be undertaken in the host countries The author divides these specific advantages into three categories: a) The economic benefits; consist of quantitative and qualitative factors of production, costs of transport, telecommunications, market size etc.
b) Political advantages: common and specific government policies that affect FDI flows:c) Social advantages: includes distance between the home and home countries, cultural diversity, attitude towards strangers etc. 3) “I” from Internalization:This third characteristic of the eclectic paradigm OLI offers a framework directed towards profitability for the company after the first and two conditions quoted are met. Thereby, as cross-border market Internalization becomes higher, the more confident the firm can engage in foreign production rather than offering licensing and franchising. This means that, Internationalization “I” allows companies to assess different ways to explore as well as exploit its expertise in sale of goods and services under various agreements that might be signed between the companies. The Eclectic paradigm OLI parameters are different from company to company and depend on the context of the economic, political, social characteristics of the host country.. Every FDI, according to Dunning assess ownership specific advantages (OSA), location specific advantages (LSA) as well as internationalization specific advantages (ISA) before making any decision about their company.
All the advantages are interrelated and affect in particular the decisions of “why”, “how”, and “where” to internationalize . Key determinants internalization process is shown in the figure below:
