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4 Country Contextual Analysis

4.1 Contextual factors

The 19 countries eligible for the B2B Programme (which mainly were Danida priority countries) are very diverse; from small West African LDCs to the economic giant China. The countries represent major differences in attractiveness as business destinations for outside investors, from fast-growing, low labour cost environments welcoming Foreign Direct Investment (FDI) such as Vietnam, to the economically closed Bhutan. The Evaluation has from general economic theory identified a series of country contextual parameters to capture country differences that might influence the attractiveness of the B2B programme and whether the Pilot partnerships continue to the Project phase. The parameters used are:

  • The business environment, with the hypothesis that the better the business environment, the more attractive for Danish firms to engage in B2B and the greater the chance for successful collaborations. As a proxy for Business Environment, the Evaluation has used the World Bank Doing Business Index, which is the most commonly used measure of the quality of the business environment. The index is based on relative ranking of 180+ countries and is updated annually. The 2010 report (reflecting conditions 2009), which ranks 183 countries has been used.[16]
     
  • The degree of economic development, with the hypothesis that the more economic developed a country is, the more attractive it is as a business destination due to a higher degree of economic diversity and better purchasing power in the population. Also the hypothesis was formulated that the higher the degree of economic development, the greater the willingness by the partners to apply for Project phase support due to more established institutions, lower degree of uncertainty and more sophisticated local partner companies. The World Bank’s data on GNI per capita in 2010 has been used as indicator.[17]
     
  • The market size, using the World Bank’s data on country’s GNI in USD 2010 as an indicator with the hypothesis that larger markets are more attractive than smaller as they would have greater business opportunities.[18]
     
  • Economic growth, using the World Bank’s data and calculating the average per annum GDP growth from 2006 to 2011 as indicator.[19] The hypothesis is that fast growing economies are more attractive to Danish businesses than slow growing. Fast growth creates opportunities and expands markets.
     
  • Degree of corruption, using Transparency International (TI) corruption index in 2010 as an indicator.[20] TI ranks some 180 countries based on the perception in the business community of country corruption. The hypothesis is that the higher the degree of corruption, the less attractive the country would be for the Danish firms, and the greater the chance that collaboration does not move into a Project phase as corruption creates uncertainty in business.
     
  • Political risk, using the Danish Export Credit Agency’s (EKF) rating as an indicator. EKF, similar to other Export Credit Agencies, classify countries in terms of the political risk involved in doing business (exports or investments). EKF uses a scale of 1 to 7 with 7 as the highest risk which determines the risk premium a company has to pay for insurance cover.[21] The hypothesis is that lower risk countries are more attractive to Danish firms and that chances for survival of collaborations would increase in low risk and less volatile environments.
     
  • Competitiveness. The World Economic Forum (WEF) publishes since the early 2000s yearly a Global Competitiveness Index. The index is composed of over 100 indicators involving institutions essential for business such as property rights, infrastructure, the macroeconomic environment, market efficiency, labour market, financial market, technology, and so on. The Evaluation has used data for 2010 as a proxy in WEF’s ranking of 141 countries.[22] The hypothesis is that the better the competitiveness ranking, the higher the number of B2B collaborations due to overall better conditions for business, and also the hypothesis is that the better the competitiveness, the higher the share of project Phase collaborations. It should be noted that the World Bank’s Doing Business index is quite different from WEF’s competitiveness index. A reason why both are included in the analysis.
     
  • Foreign Direct Investment in-flows for the programme period. The hypothesis is that Danish interest in the different B2B countries would reflect broader FDI flows to these countries. Also countries with higher volumes of FDI would have a higher share of Project phase collaborations, as larger inflows would be an indicator of success in foreign investments. The Evaluation used World Bank data, and calculated FDI as an annual average from 2006 to 2011.[23] FDI flows are of course also reflecting overall business environment dimensions.

The data for the 19 countries are provided in the table below:

Table 4: Selected data on business environments for the B2B countries
  Doing Business
Rank of 183
(high rank
poor business
environment)
GNI/
capita
USD
Market
size
US
billion
Economic
growth
GDP
Per cent/
annum
2006-2011
Corruption
index
Rank of
178 (high
rank more
corrupt)
Political
risk Class
1-7 (higher
number,
higher
risk)
Competi-
tiveness
Index
2010 rank
of 141
countries
FDI
inflow per
annum
USD
million
2006-2011
Bangladesh 119 516 82.6 6.3 134 6 107 860
Benin 172 687 6.0 3.6 110 6 107 60
Bhutan 126 1,896 1.3 9.5 36 6 109[24] 20
Bolivia 161 1,457 14.1 4.8 110 6 108 510
Burkina Faso 147 479 7.3 5.0 98 7 134 50
China 89 2,775 3,680.0 10.9 78 2 27 184,290
Egypt 106 1,801 146.8 5.4 98 6 81 7,290
Ghana 92 674 15.8 8.0 62 5 114 2,140
Indonesia 122 2,007 457.6 5.8 110 3 44 9,840
Kenya 95 767 29.9 6.0 154 6 106 250
Mali 156 579 7.4 5.2 116 7 132 130
Mozambique 135 373 8.2 6.8 116 6 131 1,030
Nepal 123 404 11.7 4.3 146 7 130 40
Nicaragua 117 1,079 6.2 3.3 127 7 112 530
South Africa 34 5,819 285.1 3.3 54 3 54 5,430
Tanzania 131 432 18.6 6.7 116 6 113 110
Uganda 112 419 13.4 8.0 127 6 118 740
Vietnam 93 892 76.7 6.3 116 5 59 6,950
Zambia 90 950 12.0 6.5 101 5 115 1,070

As some of the indicators have higher numbers the worse the quality, one can expect negative correlations. The correlation analysis below excludes China and Indonesia due to their special status. It should be noted in the following that the Evaluation uses correlation analysis as a practical statistical tool to show some trends and give indications, and not an exact science as the population for that is too small.

Business environment

The range in the quality of the business environment among the 17 countries is wide, with only South Africa having a reasonably good business environment according to the World Bank Doing Business Index. Fourteen of the 17 B2B countries are at the lower half among the 183 countries in the index, and some, such as Benin and Bolivia, are at the very bottom. The correlation between the business environment index and the number of B2B collaborations is -0.6,[25] indicating that business environment can be seen as a reasonably good explanatory factor for Danish company engagement in B2B.[26]

However, the correlation is far from perfect. Some countries have a much higher share of collaborations than the quality of the business environment would indicate. For example, Bolivia has attracted a considerable number of Danish enterprises to engage in B2B with local partners in spite of its poor business environment. As elaborated below, a key reason for this is active promotion of B2B in Bolivia by the embassy and also by HVR.

In terms of the share of Project phase support, no correlation can be established with the quality of the business environment as measured by the Doing Business Index. Thus, the business environment seems not to be a factor determining whether partners continue to the Project phase or not, which is contrary to the Evaluation’s hypothesis.

Economic development

Of the eligible countries, 13 of the 17 were low-income countries, and 10 of these classified as LDCs when the B2B Programme began in 2006, while the remaining six were lower middle or upper middle-income countries using World Bank and UN terminology.[27] The correlation between economic development and attractiveness to B2B as measured in number of partnerships is very low, hence it does not support the hypothesis. From a developmental point of view this is good news: Danish enterprises are seemingly prepared to enter and initiate collaborations even in the poorest nations. Neither is there a correlation between the level of economic development and share of Project phase partnerships.

Market size

The differences between the size of the economies among the 17 B2B countries vary tremendously, from Bhutan’s USD 1 billion to South Africa’s USD 285 billion (2010). The correlation between market size and Danish enterprises engagement in B2B is reasonably strong (+0.5), indicating a preference for larger economies rather than smaller; however, some of the smaller economies have attracted a substantial number of collaborations such as Mozambique, Nicaragua and Uganda. The correlation between the ratio of Project phases versus total number of collaborations against market size, on the other hand, is very weak.

Economic growth

During the period from 2006 to 2011 the 17 B2B countries showed overall good annual economic growth rates with an average of nearly 6% for all the countries, ranging from about 3% in Nicaragua and South Africa to 9% for Bhutan. This can be compared to Denmark’s growth rate for the same period, which was 0.2% per annum. The B2B period covers the global financial crisis, which peaked in 2009 when, for example, the Danish GDP declined by nearly 6%. As further discussed later in this report, the downturn in 2009 in the Western economies, including Denmark, had a considerable impact on the collaborations under B2B. Many Danish companies ended their engagement in B2B due to a need to focus on core markets and in some cases the partnership failed due to bankruptcies of the Danish firms. In contrast, the financial crisis had a marginal impact on the B2B Programme countries as reflected in their economic growth figures. The figure below shows the economic growth rates from 2006 to 2011 for four B2B countries compared to Denmark.

Figure 6: Economic growth rates for selected B2B countries and for Denmark 2006-2011

Figure 6

There is a very weak correlation (+0.2) between the economic growth rates and the attractiveness of various B2B countries to Danish enterprises. Danish enterprises seem not to have chosen the destination for their participation because of high growth rates. This is an interesting finding as the high growth rates in Sub-Saharan Africa over the last decade has in general triggered a great business interest in the continent with overall rapidly increasing inflow of FDI. Also in terms of performance (Project phase of total collaborations) there is no correlation with growth rates.

Corruption

General business and development theory claims that good governance is an essential ingredient in conducive business environments and low levels of corruption is an important element of good governance. 15 of the 17 B2B countries are placed at the bottom half of the ranking in TI’s Corruption Perception Index. Only one country, Bhutan, can be considered having a low degree of corruption, while three countries are found among the bottom quartile on the list, namely Bangladesh, Kenya and Nepal. In spite of the above, the degree of corruption seems not to play any role in Danish enterprises’ decision to engage in B2B in terms of choice of countries. There is no correlation between the corruption ranking and the number of collaborations (-0.1), nor is there a correlation between the ratio of Project phases to all collaborations. The hypothesis that the level of corruption affects the Danish company decision to engage in B2B appears incorrect. This finding is of great interest considering the programme’s strong focus on CSR as a key element of the support. Danish enterprises do not shy away from corrupt business environments, nor does it seem to influence whether they move from Pilots to Project phase.

Political risk

In terms of political risk, 13 of the 17 B2B countries are in the two highest risk categories (6 and 7), while only and one country, South Africa, is considered as having moderate political risk (2 or 3). There is a certain correlation between EKF’s political risk classification and the number of B2B collaborations (-0.5), indicating that Danish enterprises took political risk into account to some extent when engaging in the B2B countries.

For example, among the four Class 7 political risk countries – Burkina Faso, Mali, Nepal and Nicaragua – only Nicaragua attracted more than a token number of Danish firms. In terms of the ratio of transitions to B2B Project phase from Pilot, there is no correlation with political risk as measured by EKF. The lack of correlations is contrary to the hypotheses by the Evaluation.

Competitiveness

In the World Economic Forum’s Index on Global Competitiveness in 2010, 14 of the 17 B2B countries were placed at the bottom quartile of the list of 141 countries. None of the countries was classified in the top quartile, while South Africa, Vietnam and Egypt were in the second quartile. The correlation factor between the competition ranking and number of collaborations in B2B is fairly high (-0.7), hence Danish companies engaging in B2B favoured countries that are judge as competitive. Some countries deviate considerably. For example, Mozambique, which has one of the lowest degrees of competitiveness according to WEF, attracted a fair share of Danish companies. In terms of transition to the B2B Project phase there is no correlation.

Foreign direct investments

The FDI inflows to the 17 B2B countries vary tremendously. From countries such as Bhutan, Burkina Faso and Nepal which have FDI inflows from 2006 to 2011 of less than USD 50 million per annum, to Vietnam with FDI inflows at a rate of 150 times of that. However, most of the B2B countries have moderate rates of FDI inflows. Thus, 13 countries had inflows of less than USD 200 million per annum in the period. There is a strong positive correlation (+0.8) between FDI inflows and the engagement by the Danish enterprises in the different counties in the B2B Programme. Hence, Danish companies have followed the general FDI trends. The top three countries in terms of number of collaborations, Vietnam, Egypt and South Africa, are by far the countries with the largest inflow of FDI from 2006 to 2011. Noteworthy is, however, that the fourth largest B2B country in terms of number of collaborations, Kenya, had a meagre inflow of FDI of about USD 250 million per annum. A possible explanation for this is that there is a ‘positive influence’ on the image of key Danish aid destination also on the business community. East African countries such as Kenya, Tanzania and Uganda have played leading roles in Danish development cooperation over decades and Danish SMEs might feel more familiar with these countries, seeing them more positively than for example French-speaking West or Central Africa and have a stronger willingness to engage in spite of rather low interest as investment destinations in global business in general.

Summing up

The Evaluation concludes that of the selected country contextual parameters, the strongest correlation with the number of collaborations was found with the inflow of FDI to the countries, followed by competitiveness as measured by the WEF Competitiveness index, the quality of the business environment as measured in the Doing Business index, the political risk as measured by EKF, and the size of the local market. There was no or very weak correlation with economic growth rates, the level of corruption and the level of economic development, as reflected in the figure below.

Figure 7: Correlations between different contextual factors and number of B2B projects

Figure 7

A hypothesis that can be derived from the analysis above is that improvements in countries’ business environment, the competitiveness of the countries and a reduction of the political risk would attract more Danish companies, but less corruption would seemingly not have any impact. This is noteworthy, as corruption generally is placed high as a major business constraint in investment surveys. It is also noteworthy as Denmark in TI’s corruption index 2010 was ranked as the least corrupt country in the world and the B2B had a zero tolerance for corruption.

It is noteworthy that for none of the country contextual factors, there is a correlation with the share of Project phase grants of the total Pilot and Project grants. Thus, none of these factors explain why some countries have a considerably higher ratio of Project grant support of the total.

Some of the B2B countries systematically deviate from what could be anticipated out of the contextual factors in terms of Danish company engagement. Bolivia is an example with both more collaborations and a higher share of Project phase collaborations. If cultural barriers play a role, such as language, it is further noteworthy that Spanish speaking Bolivia had such a relative attraction during the B2B Programme. Kenya also deviates significantly from what could be anticipated with more B2B engagements, which is also true for Uganda, while Zambia is the reverse. The conclusions for such deviations, based on the interviews with Danish firms and embassies, are that the degree of the engagement and proactive work of the Danish embassies, consultants and HVR played a significant role in determining where the Danish companies engaged. The importance of active promotion of a programme such as B2B must be stressed. Active promotion can clearly to a high degree influence where Danish firms chose to do business.

It might be argued that engagement by Danish companies in countries with poor business environments, low competiveness and low inflow of FDI from a developmental point of view is more essential than engagement in counties with good business environments, good competitiveness and large inflows of FDI. In the former, B2B might at least in theory provide more value. As further discussed below, the Evaluation found no significant correlation with collaboration performance (such as the share of sustained partnerships, commercial performance of the local or Danish company, or development impact). The consequence of this is that the B2B projects are not performing worse in ‘difficult’ business environments, or environments otherwise attracting limited FDI. This points to potential effective development impact of a programme such B2B if it strongly promoted towards countries where the collaborations make a difference, rather than towards countries where the market forces anyway create substantial FDI flows.

4.2 B2B in relation to the recipient countries’ foreign direct investments

As found in the contextual analysis above, the strongest correlation of engagement of the Danish firms in different countries was with the FDI inflows to the countries. In many ways, a B2B partnership delivers the same bundle of inputs as investments as a partnership driven by pure commercial market forces and it is therefore relevant to place B2B in the context of FDI flows. The additions of B2B to FDI were, however, a possibly stronger focus on CSR, environment and gender than what the market triggered.

The aggregated flow of FDI per annum to the B2B countries (excluding China and Indonesia) amounts to about USD 28 billion per annum (2006-2011). This can be compared to the B2B Programme grant allocation annually of about USD 23 million.[28]

The figure below compares the relative importance of the B2B as an investment programme versus the overall inflow of FDI to the countries. The figure is based on approved amounts in USD under the B2B, assuming a six-year period of disbursement as compared to the annual inflow of FDI in USD 2006-2011.[29]

B2B has had the strongest relative importance for Kenya due to the fact that the inflow of FDI to Kenya is fairly small, USD 250 million per annum, and the B2B had a not insignificant allocation of about USD 5 million per annum, second highest of all the B2B countries. Calculated in this way, B2B represented 2% of the FDI inflow in Kenya, a fairly significant share, and as such clearly possible to have a certain macroeconomic impact. Also for the small, landlocked countries in the Himalayas, Nepal and Bhutan, the B2B had a considerable relative importance. While the B2B collaborations in both countries were limited, with less than USD 1 million per annum together, both Nepal and Bhutan had meagre inflow of FDI during the period. In the case of Bhutan, the country had an inflow only USD 20 million per annum on the average.

Figure 8: B2B investments in relation to FDI inflows 2006-2011 in the B2B countries

Figure 8

At the other end of the scale, the relevance of B2B as a source of FDI was very limited for countries such as Vietnam, South Africa and Egypt in spite of the fact that all three belonged to the top in the B2B Programme in financial allocations. All three countries had inflows of FDI in the order of USD 5-7 billion per annum, completely dwarfing the B2B Programme. The relevance of B2B as a development programme for the latter countries can be questioned.

4.3 B2B in relation to Danish FDI and trade

The Evaluation has compared the B2B allocations with the Danish FDI flows to the 19 countries for the relevant period. Danish companies by far favoured China with FDIs in the order of USD 360 million per annum on the average for 2006 to 2011, while there was no recorded investment at all for 10 of the countries according to OECD data.[30] The figure below shows a comparison between the B2B yearly average country allocations from 2006 to 2011 in USD (excluding China and Indonesia) and the annual Danish FDI to these countries for the same period:[31]

Figure 9: Relative importance of B2B investments to Danish FDI 2006-2011 (annual averages in USD million)

Figure 9

The conclusion is that the B2B Programme is of low relative importance for Danish business in Vietnam, South Africa and Egypt, the top three countries in terms of number of collaborations, while for Kenya, Uganda, Bolivia, Bangladesh, Ghana and Nicaragua the programme seemingly meant a substantial effort to introduce Danish enterprises to new investment opportunities. Noteworthy is that Benin attracted USD 5 million in Danish FDI per annum from 2006 to 2011, but no Danish company used the B2B Programme. It should also be taken into account that FDI might take place through offshore investments by Danish companies, hence is not reflected in the data above.

Looking at Danish trade with the 19 countries a similar pattern emerges, except that Bangladesh had a significant trade with Denmark. The figure below illustrates the spread (China and Indonesia excluded).

Figure 10: Danish trade 2007-2011 with B2B countries (average annual import + export in USD million)

Figure 10

The Portfolio analysis Chapter 3 showed that the B2B Programme had very different importance for the 19 B2B countries in terms of engagement by Danish enterprises with particularly low results in terms of Danish company engagement in French-speaking West Africa, while countries such as Vietnam, South Africa, Egypt and Kenya were particular attractive to the Danish enterprises. As shown above, Danish companies follow to a large extent the global flows of FDI and in particular Danish FDI and trade. Significant from a development perspective (and possibly also as a means of promoting Danish SME globalisation), is the positive deviations, i.e. when B2B seemingly were able to attract Danish firms to engage in countries with low FDI inflow and trade, countries which generally are characterized by weak business environments, low competitiveness and so on. It is on these countries where B2B can make a difference and be a potent development tool, rather than provide subsidies to Danish companies where Danish business anyway would go. This is further discussed below.


[16] data.worldbank.org › Data Catalog.

[17] data.worldbank.org/indicator

[18] data.worldbank.org/indicator

[19] data.worldbank.org/indicator

[20] www.cpi.transparency.org

[21] The Evaluation used the rating for export credits of one to five years. See www.ekf.dk.

[22] WEF (2010) Global Competitiveness Report 2010-2011.

[23] data.worldbank.org/indicator

[24] WEF 2013.

[25] Correlations range from -1 to +1 with 0 as no correlation and minus or plus 1 as perfect correlation. Negative values can be expected for rankings as low number is high ranking.

[26] There is a negative correlation for business environment index as good environment has lower numbers.

[27] OECD data for 2008.

[28] Calculated for a six year period and an exchange rate of USD 1 = DKK 5.5, and excluding China and Indonesia The disbursement period is in fact longer and still ongoing.

[29] The B2B investment is including 100% addition to the grant sum to cover the companies’ required co-financing as well as other investments.

[30] OECD 2014. It should be noted that there are some confidential information not recorded in the database.

[31] Statistics Denmark, Statbank.

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This page forms part of the publication "Evaluation of Danida Business-to-Business Programme 2006-2011 – Evaluation 2014.05" as chapter 4 of 11.
Version no. 1.0, 2014-11-14
Publication may be found at the address http://www.netpublikationer.dk/um/14_danida_btb_programme_2006_2011/index.html