Endogenisation or enclave formation? The development of the Ethiopian cut flower industry

Abstract

ABSTRACTThis paper examines the evolution of the Ethiopian cut flower industry, illustrating how rapidly a potential comparative advantage can be realised. But the question is to what extent a country benefits from this in the long run, if foreign direct investment is the principal driving force. Will the new industry become an enclave, or will it be accompanied by a process of building local capabilities, a process which we denominate endogenisation? A value chain framework is used to analyse the industry and to develop a number of indicators on the development direction. The cut flower industry in Ethiopia is characterised by a dominant role of Dutch foreign investors, Dutch trade auctions which dominate the export trade, and the Dutch development cooperation which plays an important role in the development of the sector. This raises the question to what extent this triple role of the Dutch contributes to endogenisation or to enclave formation.We conclude that endogenisation is a two-way process. It depends both on the degree to which FDI has an interest to draw on domestic firms, enter into relationships and share technologies; and on the interest and ability of domestic firms to take up such opportunities, and on the creation of supporting institutions and infrastructures to make this take-up possible. The latter rests largely with government. Endogenisation is taking place to some extent and at a very incipient stage. Dutch FDI has little direct interest to share technologies, but there is joint collective action on non-core activities, notably transport, which constitutes the largest item in the total cost. Dutch cooperative flower auctions are an open and vital trade channel giving Ethiopian flower growers access to international markets. The Ethiopian government has promoted the industry, making available land and low cost finance; and with the assistance of Dutch bilateral cooperation it is creating trade standards and supporting knowledge institutions to train skilled staff. The main challenge is Ethiopian entrepreneurship: many are attracted by the high growth and profitability of the industry and can run a business in Ethiopia, but lack the technical competence to meet growing competition in the industry.