by Vito Amendolagine (Università degli studi di Foggia)
The African Continental Free Trade Area (AfCFTA), which entered into force in 2019, promises to open a window of opportunity for developing new Regional Value Chains (RVCs) by boosting manufacturing and enhancing cross-border trade among regional players.
Micro, Small and Medium Enterprises (MSMEs) account for two-thirds of total employment in developing and emerging economies. In the Middle East and North Africa, self-employment and micro enterprises (with fewer than ten employees) account for 70% of total employment. In Sub-Saharan Africa, self-employment, micro-enterprises and small enterprises (between 10 and 49 employees) account for about 91% of total employment (95% in the agricultural sector and 80% in industry and services).
Global Value Chains (GVCs) can be an opportunity for economic development. The benefits can be particularly large for MSMEs, as integration into GVCs can help them scale up their operations, improve their productivity and acquire new technology.
Currently, the participation of African producers in GVCs is very limited and has scant benefits due to large-scale and technological gaps with lead global players. Africa’s participation mostly consists of exports of raw natural resources and agricultural commodities processed abroad. Nevertheless, the African Continental Free Trade Area (AfCFTA), which entered into force in 2019, promises to open a window of opportunity for developing Regional Value Chains (RVCs) by boosting manufacturing and enhancing cross-border trade among regional players. According to the United Nations Economic Commission for Africa (UNECA), the AfCFTA, by creating a single market for goods and services, can boost the value of intra-African trade to US $195 billion by 2045, provided the AfCFTA Agreement is fully implemented, and private sector is in a position to take advantage of it. MSMEs occupy a significant place in Africa’s private sector landscape, and their participation in RVCs under the AfCFTA can pave the way for their insertion into GVCs. However, MSMEs suffer from several limitations when trying to access cross-border value chains, including limited scale, lack of financial resources and poor access to technology.
MSMEs can more easily access and benefit from RVCs/GVCs by establishing linkages with local subsidiaries of foreign multinational enterprises (MNEs) (Figure 1). These linkages can yield mutual benefits. On the one hand, MNEs can gain access to local resources—tangible and intangible—and adapt their technologies and products to local economies. On the other hand, MSMEs can access new, larger markets and embark on product and process innovation driven by MNEs’ demand.
Linkages can take different forms: (a) backward linkages, by which multinational enterprises source components, materials and services from local suppliers; (b) forward linkages with local customers (such as outsourced marketing outlets and after-sales services); (c) horizontal-type linkages, which are set with local competitors; (d) linkages to technological partners, through joint ventures, licensing agreements or strategic alliances; (e) other forms of linkages, such as when trained workers move from MNEs to local enterprises.

A recent report commissioned by the United Nations Economic Commission for Africa Subregional Office for Southern Africa (UNECA, 2024), investigates the factors that can shape the likelihood and the benefits of linkages within the Southern African context. The report is based on two surveys: one to local MSMEs and the other to MNE affiliates. The first survey covers MSMEs active in various economic sectors in Botswana, Lesotho, Mauritius, Mozambique, Namibia and Zambia. The managers of five foreign MNE affiliates completed the second survey, namely two South African food retailers, two South African manufacturing enterprises and one Japanese enterprise active in the fishing sector. Moreover, during the field mission to Namibia, relevant institutional stakeholders, such as the Namibia Investment Promotion and Development Board and the Ministry of Higher Education, Training and Innovation, were also interviewed and were asked about the status of linkages in the country and the opportunities and challenges faced by companies in that regard.
The study offers a number of relevant findings: At the MSME level, innovative enterprises are particularly well-positioned to build vertical linkages—whether backward or forward—with foreign-owned companies, which can translate into significant benefits like enhanced employment, wages, and product innovation. These businesses not only capitalize on backward linkages but also demonstrate resilience in the face of increased competition from foreign firms, often responding by stepping up their own investments and innovation efforts. Access to external funding and product quality certifications further strengthens their competitive edge in the local market, enabling them to hold their ground against foreign competition.
Geography plays a pivotal role in shaping these linkages between local MSMEs and multinational subsidiaries. MSMEs situated within a five-kilometer radius of a foreign-owned company are far more likely to establish backward linkages and engage in technological partnerships with MNE affiliates. This close proximity also facilitates the development of first-tier linkages that benefit local suppliers directly by enabling them to supply intermediate inputs to these companies.
The manufacturing sector, in particular, shows a greater tendency for MSMEs to form backward linkages with foreign MNEs. Through these connections, MSMEs receive stronger support for developing innovative products, which in turn helps them respond effectively to competition from foreign entrants by increasing their investments in innovation. Notably, African MNE affiliates stand out for their robust support of local suppliers compared to non-African affiliates. Suppliers working with African MNEs are more likely to experience enhanced outcomes across several dimensions, including employment, wages, investment levels, environmental sustainability, and innovation.
There is a lot that policymakers can do to strengthen the potential of local MSMEs to integrate with multinational enterprises (MNEs) and boost regional economic development. Enhancing public education and vocational training systems could help equip the local labour force with skills tailored to MNE’s specific requirements. Simultaneously, promoting MSMEs’ formal registration in public databases would improve their access to external credit sources, which is critical for expanding their investment capacity and aligning their production processes with those of MNEs.
Supporting MSMEs in achieving product certification—and harmonizing certification standards, at least at the subregional level—could also open more linkage opportunities, as certification is key for collaboration with MNEs. Further, developing co-located industrial areas for MNE affiliates and local MSMEs, alongside improvements in transport and digital infrastructure, would foster first-tier linkages, which offer considerable benefits to MSMEs.
Additionally, setting minimum local content requirements for MNEs, even temporarily and targeted to certain sectors, could significantly increase the sourcing of local inputs. This would foster stronger connections between MNEs and local suppliers and bolster local economic integration.
Overall, fostering linkages between MNEs and African MSMEs through strategic partnerships and alliances embedded in investment and trade agreements can contribute to the development of RVCs and the participation of MSMEs in them on the continent to better take advantage of the AfCFTA.
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This post is based on the report commissioned by the United Nations Economic Commission for Africa (UNECA) Subregional Office for Southern Africa (SRO-SA) titled “Building linkages between micro-, small and medium-sized enterprises and multinational companies from the global South: the case of Southern Africa” written by the author under the supervision of Bineswaree Bolaky, Economic Affairs officer (SRO-SA) and the guidance of Eunice G. Kamwendo, Director, SRO-SA.
Vito Amendolagine is an Associate Professor of Economics, Università degli studi di Foggia
This post represents the views of the authors and not those of the GILD blog nor the LSE.