Coordinated by In partnership with PEDL Research Note - ERG project 106: Flying Geese in Ethiopia’s Leather Cluster? Understanding Asian/Chinese Impact The Role of Foreign Investment in Ethiopia’s Leather Value Chain Deborah Brautigam, Margaret McMillan and Xiaoyang Tang In Ethiopia, significant potential for private sector transformation lies in the leather value chain. Ethiopia is home to one of the largest livestock populations in the world and Ethiopian goat and sheepskins are known for their superior quality. Yet Ethiopia’s share in world trade of leather and leather products is tiny. For example, in 2010, Chinese exports of leather products were estimated at $8.3 billion while Ethiopian exports were estimated at only $3.7 million. Formal Chinese firms employed almost 3 million workers while Ethiopia’s formal firms employed a mere 7,600 workers. It is therefore not surprising that the Ethiopian government has been actively involved in the promotion of industrialization in the leather value chain. Because local tanneries were not advanced enough to process up to the crust level, the government suspended the ban on new foreign investment in tanneries for several years. As a result of relaxing these controls, Ethiopia has seen a significant increase in foreign investment in leather processing and manufacturing since 2004. At the same time, the government initiated a series of programs to support informal shoemakers and implemented a series of trade policies such as export bans and taxes targeted at keeping raw hides in the country for processing. These measures aim to incite foreign firms to relocate more of the leather transformation process to Ethiopia, in the hope that spill-overs from their operations will improve local technology and knowledge all along the value chain. However, foreign investors could also harm the Ethiopian leather sector if they compete with local tanneries while operating in isolation or capture the markets presently served by informal businesses. Foreign firms, particularly those from China and other parts of Asia, have been investing in Ethiopia’s leather sector, but very little information about their operations has been officially recorded so far. A census of foreign-owned and local firms involved in the leather value chain In order to better understand the impact of foreign, and, in particular, Asian investment on Ethiopia’s leather industry, we conducted a census of all formal firms currently active in the leather value chain. We began with Asian‐owned firms and, using snowball techniques, moved to their Ethiopian (and non‐Ethiopian) contacts in the leather cluster, which included subcontractors, suppliers, buyers, and trainers. We also interviewed all foreign‐owned firms, asking about their Asian linkages. Subsequently, through semi‐structured interviews and focus groups with Ethiopian officials and industry associations, we asked about proactive efforts, if any, by Ethiopians to engage Asian factory owners and learn from Asian practices through field visits and investment promotion tours. We were able to interview all of the foreign firms in the leather industry and 20 of the 26 domestic firms. Foreign investment in the leather processing sector As a whole, the Ethiopian leather processing industry (by which we primarily mean tanneries) experienced substantial investment by foreigners. All four of the Chinese tanneries surveyed—as well as two Indian tanneries— that decided to invest in Ethiopia had bought leather from local Ethiopian tanneries for between 7 to 14 years prior to investing. Each Asian firm reported that their primary reason for investing in Ethiopia was to secure their leather supply. A census of formal firms in the Ethiopian leather industry revealed that the change in government policy was successful in attracting foreign direct investment in the processing of raw hides and in the manufacturing of leather products. This has led to some degree of technology transfer, albeit limited so far. Policies to encourage value‐added local processing have been more successful with the large foreign tanneries than the smaller Ethiopian ones.