Inclusive Industrialization: The Interplay Between Investment Incentives and SME Promotion Policies in Sub-Saharan Africa
This academic article examines the relationship between two policy objectives that feature prominently in the development strategies of most Sub-Saharan African countries: attracting foreign direct investment (FDI) and promoting the growth of small and medium enterprises (SMEs). Both objectives are also explicitly endorsed by the UN’s 2030 Sustainable Development Agenda. While a substantial body of literature addresses how these goals can be mutually reinforcing, this paper focuses on the less-explored question of whether, and under what conditions, the policies adopted to pursue them may work at cross-purposes.
The paper concentrates on two commonly used sets of policy instruments: investment incentive packages — including fiscal benefits, minimum capital requirements, and Special Economic Zone (SEZ) or Export Processing Zone (EPZ) regimes — and local content requirements, typically adopted to encourage linkages between foreign investors and the domestic economy. With respect to investment incentives, the paper finds that SMEs, while rarely formally excluded from available tax exemptions and other benefits, frequently face difficulty meeting the minimum capital thresholds or export requirements attached to them. The spatial and legal structure of SEZs can also create conditions in which it is more cost-effective for zone-based firms to source inputs from foreign rather than domestic suppliers, given the different tax treatment applied to each.
With respect to local content requirements, the paper considers circumstances in which mandatory sourcing obligations may increase the cost and complexity of investment in ways that affect FDI attraction, particularly in smaller host countries where investors have a range of comparable location options. The effectiveness of such requirements is also found to depend significantly on the absorptive capacity of domestic firms, with the paper drawing on examples from Asia and Africa — including the Malaysian Proton case — to illustrate how mismatches between local content obligations and domestic supplier capabilities can undermine both FDI and SME outcomes.
The paper goes on to survey a range of policy approaches that countries have adopted to better align these two objectives, including restructured capital thresholds, SME-inclusive SEZ designs, flexible and investor-specific local content frameworks, absorptive capacity building programs, and supplier databases. It concludes that while trade-offs between FDI and SME promotion policies are real and context-specific, they are not inevitable, and that greater policy coordination between the institutions responsible for each set of objectives is a necessary condition for achieving inclusive and sustainable industrialization.
