INVESTIGATING THE EFFECTS OF FOREIGN DIRECT INVESTMENT ON EXPORT GROWTH IN CAMEROON

INVESTIGATING THE EFFECTS OF FOREIGN DIRECT INVESTMENT ON
EXPORT GROWTH IN CAMEROON


By
Aloysius Mom NJONG
University of Dschang
Faculty of Economics and Management
PO Box 285 Dschang- CAMEROON
E-mail: mom_aloys@yahoo.fr
Tel: +237 77 71 46 90



Final version of paper submitted to UNECA for the 24-25 November Ad-hoc Expert Group
Meeting in Addis Ababa, Ethiopia.



21 October 2008




ABSTRACT

The theoretical relationship between FDI and export growth can be explained by using
the flying geese model, Vernon’s product life cycle theory and the new growth model.
These three theories have different explanations of FDI flows; however, they all agree
that FDI has an influence on the recipient economy. First, MNE subsidiaries exploit the
host country’s factor endowments for lowering production costs to increase their export
competitiveness. Therefore, the host country’s export expansion by MNE subsidiaries is
to be expected (capacity-increasing effect). Secondly, the host country’s export can be
increased by domestic firms through the spillover effects of FDI such as competition and
transfer of knowledge (spillover effect). This study attempts to estimate the potential
effects of FDI inflows on export growth in Cameroon over the 1980-2003. We separate
the effects of FDI into supply capacity-increasing effects and spillover effects. The major
hypothesis of the study is that FDI has had a positive impact on Cameroon export
performance. We find evidence that FDI inflows contributed to higher supply capacity
and spillover effects in Cameroon, leading to higher export growth during the period of
study.

Key Words: Capacity-increasing effect, spill-over effect, foreign direct investment,
export growth, Cameroon.

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1. THE RESEARCH ISSUE
There has been a long debate in the literature on how host country’s exports respond to
inward foreign direct investment (hereafter referred to as FDI). A crucial issue in this
debate is whether FDI is a means of stimulating export performance of the host countries.
The influence of FDI on the host country’s export performance can be explained by using
the flying geese model, Vernon’s product life cycle theory and the new growth theory.
Although these three models have different explanations of FDI flows, the direct and
indirect effects of FDI provide a starting-point that FDI is likely to have a positive
influence on the host country’s export performance. Firstly, FDI is undertaken for the
purpose of cost reducing, and the use of the host country’s factor endowments ( for
instance, cheaper labour costs and relatively abundant resources directly decreases the
foreign firm’s production costs and increases their export competitiveness). Secondly, the
existence of competition between multinational enterprises (MNEs) and local firms
provokes the local firms’ export propensity to protect their sales and markets. Moreover,
the transfer of new technology and skills from MNE subsidiaries to indigeneous firms
(spillover effects) are expected to increase local firms’ export ability (Caves, 1996;
Zhang and Song, 2000). As a consequence, the direct and indirect effects of FDI together
enhance the host country’s export performance.
The available empirical evidence of the role of FDI on export performance of host
countries is mixed. Several cross-country studies found support for the hypothesis of a
negative relationship between FDI and export (Jeon 1992). Moreover, Sharma (2000)
does not see any statistically significant impact of FDI on Indian exports. In contrast,
other studies indicated that FDI actually has a positive effect on export performance of
host countries (Cabral, 1995; Blake and Pain, 1994).
Cameroon’s exports have grown much faster than GDP over the past few decades.
For example, its exports have grown over 11 percent per year while GDP growth was
about 4.5 percent over the period 1994-2003 (INS, 2005). Several factors appear to have
contributed to this phenomenon including foreign direct investment (FDI) which has been
rising consistently especially from the late 1990s. However, despite increasing inflows of
FDI there has been limited attempt to assess its contribution to Cameroon export
performance- one of the channels through which FDI affects growth. Moreover, there’s

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little or no empirical research that separates the potential effects of FDI into supply-
increasing effects (capacity effects) and spillover effects. The supply-increasing effects
arise when FDI inflows induce increases in the host country’s production capacity,
which, in turn, increase export supply capacity. The FDI-spillover effects arise because
foreign capital inflows may incorporate different competitive advantages, such as
superior knowledge and technology and thus, higher productivity, or better information
about export markets as compared to local firms (Basu, 1997). We believe that
differentiating between these two effects of FDI on exports is especially important in
terms of policy implications. It is often argued that successful FDI promoting policies
should lead to, among other things, a significant increase in the host country’s exports.
However, if evidence indicates that FDI increases exports only through increasing export
supply capacity, then FDI inflows are not special in that policymakers could increase
exports through alternative means as well, such as promoting domestic investment, rather
than FDI. If, on the other hand, one finds that there are positive spillover effects of
foreign capital inflows on exports, this would mean that specific efforts aimed at
attracting further FDI would be justified. The main objective of this study therefore is to
investigate the contribution of FDI capacity effects and FDI-spillover effects on the
export performance of the Cameroonian economy over the period from 1980 to 2003. We
hypothesize that FDI inflows had a positive impact on the export growth of the Cameroon
economy over the period 1980-2003.
The rest of the paper is organized as follows. Section 2 casts some light on FDI
inflows and the export performance of the Cameroonian economy. Section 3 dwells on
the theoretical framework of the impact of FDI on exports. Description of the data and
the empirical model is presented in Section 4. Estimation results are discussed in Section
5, while concluding remarks with policy implications are offered in the last Section.

2. FDI INFLOWS AND EXPORT PERFORMANCE IN CAMEROON

2.1 Pattern of overall FDI Inflows in Cameroon
Foreign involvement and the participation of multinational enterprises (henceforth
MNEs) in economic activity in Cameroon can be traced as far back as 1884 with the

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German annexation of Cameroon. During this period, European colonial masters saw
developing countries as source of raw materials and markets for their finished products.
This was manifested in Cameroon by the creation of huge corporations to produce both
food and cash crops – cocoa, coffee, banana, plantain, and rubber – on huge industrial
plantations. With the defeat of the Germans during World War one, Cameroon was
partitioned between Britain and France under the trusteeship rule of the League of
Nations in 1922 (Awa, 1993). However, the emphasis did not shift from production and
exportation of agricultural raw materials and full foreign control over the domestic
economy. Imports into Cameroon consisted mainly of manufactured goods for
consumption and machinery for agricultural production.
The lessons from colonial rule were evident a few years after independence when
the British and French territories united to form the present day Cameroon. In the early
years following independence, FDI and MNEs in general were perceived as an evil that
negatively influenced internal decision making, induced loss of control over domestic
policies, and imported obsolete technology (Zisuh, 2003). This resulted in a process of
naturalization of all foreign concerns and maximum State control of the public and
private sectors of the economy. Nevertheless, foreign investors still participated in a few
private enterprises in the form of equity holdings and joint ventures (Awa, 1993). This
type of equity participation accounted for a substantial part of FDI flows to the country
up to the mid-1980s when the government allowed for the establishment of foreign
affiliates in the country.
Foreign investment in Cameroon today is mostly in the form of direct investments
with an insignificant amount of portfolio investments. According to UNCTAD (2000),
FDI in Cameroon is still limited but increasing. Table 1 summarizes the magnitude of
FDI in Cameroon for selected years. Cameroon was one of the lowest recipients of FDI
among developing countries until the early 1980s. For instance, inward FDI stocks
reached 330 million dollars or 4.9 percent of GDP as against an outward stock of 23
million dollars or 0.3 percent of GDP (Table 1). A possible reason for this low level of
FDI is state involvement in owning the largest share in big business concerns thereby
limiting foreign shareholdings of equity. Lengthy approval process and restrictions of
foreign participation in many areas – such as utility industries – also appear to have

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discouraged foreign investment. Although the absolute value of inward FDI stocks rose
sharply in the 1990s in comparison with earlier periods its share of GDP has not made
any remarkable progress. Observe in Table 1 that it was only after 1995 that Cameroon
experienced a significant inflow of FDI, which has been on an increase to date.
Although Cameroon is not yet anywhere near most African countries and second
to Gabon in the franc zone in attracting FDI, it has done remarkably well in recent years
compared with its own past performance. Table 1 shows that FDI inflows reached 50
million dollars in 1998 just from over 13 million dollars during 1990. The share of FDI in
both gross fixed capital formation and GDP reached over 2 percent from less than 0.8
percent before 1985. This increase in FDI inflows appears to be due to the opening up of
the Cameroon economy since 1992. Cameroon’s inward FDI performance index1
increased from -0.3 over the period 1988-90 to 0.1 over 1998-2000, while inward FDI
potential also increased from 0.16 to 0.28 revealing that some progress was being made
(INS, 2005). Despite Cameroon’s promising economic potential in Sub-Saharan Africa,
foreign investors considered the country to be a high-risk zone for investments when
political and economic conditions deteriorated during the early 1990s. Since the
devaluation of the CFA franc in 1994, net FDI has been on a steady increase, driven
almost exclusively by occasional privatization and oil sector investment (EIU, 2002).


1 Inward FDI performance index is the ratio of a country’s share in global FDI flows to its share in global
GDP,

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Table 1: FDI Descriptive Statistics for Selected Years (in US$ m and percentages)



FDI Inflows
As % of GFCF
FDI Stocks
As % of GDP
Net FDI
Inward
Outward Inward
Outward Inward Outward Inward
Outward Flows (% of
GDI)
1980
13 12
0.3
0.3 330
23 4.9 0.3 8.2
1985 18
13
0.7
0.6
1125
53
13.8
0.6
1.0
1985-89
(av.)
23
17
1.0
0.8 954 78 10.2
0.9
1.4
1990
13
19
1.6
0.4 1044 150 9.4
1.3
1.6
1995
34 4 2.7 0.3
1664
227
13.3 2.9 2.7
1998
50 1 3.1 0.1
1985
239
13.9 2.9 3.1
2000
59 3 2.3 0.2
2463
255
14.2 3.4 0.4
2001
67 4 2.1 0.2 2939 257 14.7 3.6 19.2
2003
75 3 2.2 0.2
3521
280
16.1 3.7 4.8

Source: Compiled by author based on data from World Investment Report (2005); and World Bank Africa Database CD-ROM (2005)

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2.2 Trade and Investment Policy Reforms in Cameroon
a) Trade Policy Reforms in Cameroon
Before 1989, Cameroon’s trade policy was protectionist with important non-tariff barriers
(NTBs), the fiscal structure had about 20 different taxes applicable selectively to import
and export products at rates sometimes reaching 150% of the cost-insurance-freight (cif)
value (Bamou et al. 2006).This protectionism was reduced from 1989 with the
implementation of the Structural Adjustment Programme. Quantitative restrictions as
well as price controls were gradually abandoned. In 1994, the substantial tax reform
proposed within the framework of the Central Africa Economic and Monetary
Community (CEMAC) was implemented and further simplified the fiscal system to
improve competitiveness and promote foreign investment. The fiscal system was further
boosted by the devaluation of the CFAF2 in 1994. From 1994, market access conditions
improved significantly thanks to the commitments of the Uruguay Round (which consists
among others; limiting the use of NTBs, avoiding future increases in tariff protection etc)
and the decision to apply the Most Favoured Nation’s clause thereby granting to
developing countries including Cameroon, a number of trade preferences.

During this adjustment period, the government of Cameroon also implemented
many sectoral reforms. In the agricultural sector, subsidies to support farmers were fully
or partially suppressed and agro-enterprises were restructured, followed by privatization,
liquidation or outright closure. In the industrial sector procedures for obtaining technical
importation visas were simplified. The banking and insurance services were liberalized
and opened to competition and placed under the authority of Central African Banking
Commission (COBAC) and Community Code of the International Conference on
Insurance Markets (CIMA) (Bamou et al. 2006).

b) Investment Policy Reforms in Cameroon
The import-substitution era in Cameroon started in 1963 with the creation of the Société
Nationale d’Investissement (SNI) and subsequent resolutions (Zisuh, 2003). According to
the regulations, the state generally took a shareholding in larger ventures in the private
sector, thereby forming joint ventures with the private sector. Thus, before 1980, the state

2 CFA F means Franc de la Communauté Financière d’Afrique.

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was largely involved in both public and private sectors under its policy of balanced
development and FDI was strictly limited to equity participation in joint ventures
(Encyclopedie du Cameroun, 1983).
From 1990 to 2002, a new wave of investment policy reforms was launched to
adapt the investment policy to the new liberal economic environment following the
implementation of the SAPs. The concepts of competition and the need to process
primary products before exportation were strongly stressed in this reform. Two structures
were created to support this new policy: the National Industrial Free trade Zone and the
Investment Code management Unit. In the framework of this structure, any
manufacturing or service industry authorized by the zone’s administrative body, can
import the means of production, equipment and raw materials free of duty, licenses and
customs control, provided more than 20 percent of the annual turnover of the enterprise
crosses the zones boundaries into Cameroon customs territory (BEAC, 2005 ; MINEFI,
2006). Zone users are exempted from exchange control regulations and can freely export
the proceeds of their investment. After ten years in operation companies will be subject to
corporation tax but other zone tax exemptions remain. Outside the industrial free zone,
overseas firms and foreign employees are subject to local income tax requirements but
income and profits can be freely remitted within the franc zone and elsewhere in
accordance with the zone’s regulations.
In 2001 an investment charter was passed by parliament and includes incentives
to attract foreign investment capital (MINEFI, 2006). In this charter, the state promises to
ensure the exercise of justice and to guarantee the safety of persons and property through
sensitization, the termination of all forms of bureaucracy and harassment, the fight
against corrupt behavior, the expedition of hearing of court cases, and ban all forms of
discrimination.

2.3 Export Performance in Cameroon
The export growth performance of the Cameroon economy can be attributed to two key
issues. Firstly, Cameroon benefits from its diversified export base although it is highly
dependent on primary products. Secondly, as stated earlier, exports have grown rapidly
since 1995. These can be attributed to several factors. Firstly, the devaluation of the CFA

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franc in 1994 made exports more competitive. Secondly, market liberalization as well as
liberalization in investment policy after 1992 attracted domestic and foreign private
investment and helped reduce the bias against exports. Export growth was slow in the
mid-1980s and mid-1990s due partly to economic crisis and bad government practices
that were unfavorable to export production. Table 2 summarizes the structure of
Cameroon exports (that is, a sector-breakdown of exports). Table 2 indicates that the
share of oil, which dominated exports in the 1980s, declined from 7655.5 in 1985-90 to
5014 barrels in 1997. This may be explained by improved, earnings from coffee and
cocoa boosted by rising world prices (UNCTAD, 2002). Cameroon’s exports are
dominated by non-manufactured goods, which account for over 28 percent of GDP
(MINEFI, 2003). Six major items – forest product (logs and wood), petroleum and other
oil products, cocoa, coffee, cotton, and oil palm - dominate primary exports. Because
Cameroon is a typical agricultural country, it is important to mention that climate changes
may also contribute significantly to output variations for the primary agricultural
products. Growth in primary exports has been associated with a corresponding growth in
merchandise exports, which stood at 2,165 million U.S. dollars in 2000 up from 1605
million dollars in 1995-96 (Table 2).
On the other hand, manufactured goods export in Cameroon is at its infancy
accounting for less than 5 % of GDP (see Table 2). Insufficient capital, inadequate skilled
labor, poor and limited infrastructure, and above all administrative malpractice are the
factors that impede modernization and growth in the industrial manufacturing sector.
Thus, the manufacturing sector is mostly concerned with food processing, brewery,
textile and leather, wood, rubber, metal and mechanical engineering, chemical, and
electrical industries on a light and intermediate scales. Heavy industries are absent.

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Table 2: The Structure of Cameroon Exports for Selected Years (metric tons unless stated otherwise)

1980-85
1985-90
1990-95
1996 1997 1998 1999 2000
(average) (average)
(average)
Forest
products
534 630.5 932.5 987 1011 1097 1263 1311
Petroleum and other oil products
5113.5
7655.5
6412.7
5278.0
5014.0
5532
6200
5503
Cocoa
96.3 115.3 98.8 120 142 107 122 121
Coffee
93.3 121.3 91.2 63 74 82 53 69
Cotton
24.2 23.8 44.5 54 66 51 61 65
Oil-palm
products
14.5 24.2 21.7 8 41 23 98 99
Manufactured goods (US$ m)
96
277
268
259
302
291
423
299
Total Exports (US$ m)
2285.5
2344.5
2166.7
2048
2306
2306
2241
2728
Merchandise
exports
(US$
m)
1841 1970 1791 1605 1816 1800 1682 2125
Manufactured goods exports (% of
1.2 4.1 4.2 3.3 3.3 3.2 4.9 4.3
GDP)
Non-manufactured goods exports (%
28 18.4 17.8 19.6 22.1 23.2 19.8 26.2
of GDP)
Source: Compiled by author from National Accounts Statistics CD-ROM 20043

3 The National Accounts Statistics CD-ROM is obtainable from the National Institute of Statistics, department of the Ministry of the Economy and Finance.

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