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FDI and Export Participation of Local Firms in Africa: The Case of the Kenyan Garment Industry

Discussion Papers

No.232

April, 2010

ABSTRACT

FDI in the garment sector has been the single case of large-scale manufacturing investment in African low-income countries since the 1990s. While FDI has triggered the development of local industries in many developing countries, it has not yet been realized in Africa. This paper describes the spillover process in the Kenyan garment industry and investigates the background of local firms’ behavior through firm interviews and simulation of expected profits in export market. It shows that credit constraint, rather than absorptive capacity, is a primary source of inactive participation in export opportunity. Only firms which afford additional production facilities without sacrificing stable domestic supply may be motivated to start exporting. However, in comparison with successful Asian exporters, those firms were not as motivated as Asian firms due to the large gap in expected profits.

Keywords: manufacturing exports, FDI spillover, sub-Saharan Africa
JEL classification: O14, F21, O33, L67

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