Evaluating the Impact of Chinese Partnership on the Small and Medium Enterprise (SME) Landscape in Tanzania

Introduction

Tanzania, with its rich resource base and strategic geographical location, has become a focal point for international partnerships, particularly with China. By evaluating the SME sector, we gain insights into how foreign investments influence the local business environment. Examining the cooperation with China would unravel the impact of cross-cultural collaborations, technology transfers, and trade dynamics on the entrepreneurial landscape. Understanding how Tanzanian SMEs engage with Chinese partners provides a valuable perspective on innovation, market access, and the potential for sustainable development. Such an analysis not only sheds light on the current state of affairs but also has the potential to inform strategic decisions for fostering resilient and mutually beneficial partnerships, ultimately contributing to the socioeconomic growth of Tanzania.

Tanzania’s SME Landscape

Post-independence, Tanzania adopted a centrally planned economy, with authorities channelling efforts to build up public domains, neglecting private sector growth (“The Game-Changing Role of SMEs in Tanzania’s Economy”). As a result, Tanzania’s private sector remains relatively young, where large locally grown enterprises are few and far between.

Today, more than 95% of businesses in Tanzania are small enterprises according to the Tanzania Chamber of Commerce, Industry and Agriculture (TCCIA). However, this figure also accounts for survivalist enterprises with income generation less than the minimum income standard or poverty line, including vendors, brokers, itinerant traders, and hawkers (“Tanzania’s Small and Medium Enterprises (SMEs)”). In such enterprises, asset values are minimal and employees often go unpaid.

The informality of Tanzania’s SMEs has stunted the sector’s growth, with many enterprises failing to secure much needed financial resources from banks (“Tanzania’s Small and Medium Enterprises (SMEs)”). Financial institutions offering such resources require collaterals, accurate accounting information and documentation – most of which smaller Tanzanian SMEs are unable to provide.

Apart from the access to financial resources, SME development is also constrained by unfavorable regulatory stipulations, undeveloped infrastructure, poor business development services, and poorly coordinated institutional support frameworks (Sitorus).

The Impact of Chinese Intervention

2024 marks the 60^th anniversary of the establishment of diplomatic ties between China and Tanzania (Xinhua). Chinese and Tanzanian cooperation saw projects such as the Belt and Road Initiative as well as the construction and refurbishment of the Tanzania-Zambia railway line (TAZARA) (“Ambassador Chen Mingjian”).

Chinese partnership has been largely beneficial to Tanzania, facilitating economic growth and recovery. Trade between both countries has been flourishing in the past few years, with merchandise exports reaching USD$6.83 billion (Figure 1.1).

Figure 1.1

Most of Tanzania’s exports to China also enjoy China’s Preferential Tariff treatment. These include cotton, sisal, sesame seeds, wet goat skins, seashells, waste plastics and sea weeds (“Statement on Sino-Tanzania relations”).

Specific to SMEs, there has also been growing interest amongst Chinese investors in Tanzanian companies. Initially, this interest was mainly directed at industries such as construction, manufacturing, natural resources and textiles. Nonetheless, bigger Chinese investors are now looking to invest in the mining, energy and agriculture segments (“Statement on Sino-Tanzania relations”). More recently, Chinese development assistance has expanded to encompass concessional and commercial loans in key sectors (Chen and Voncujovi). China Development Bank (CDB) had issued a USD$1 billion loan to African SMEs with aims of helping them “acquire more financing, enhance local businesses’ access to foreign currency exchanges, and improve Africa’s industrial infrastructure.” (Runde et al.). By 2018, CDB reported that it had invested in approximately 500 projects, amounting to USD$50 billion over the years (Runde et al.). In the agribusiness sector, Chinese companies procured their supplies from local Tanzanian SMEs.

Nevertheless, it must also be acknowledged that Chinese private capital and investors have a limited relationship with SMEs in Tanzania. While there are a handful of Chinese programmes designed to support African SMEs, majority of Chinese funding had gone directly to governments to support infrastructure or Chinese-owned firms in the region (Runde et al.). Comparably, Chinese investment in local SMEs, both directly or via intermediaries, was far more limited. Moreover, while Chinese investments in the private sector has increased over time, few Chinese firms are sharing technology and expertise with Tanzanian SMEs, restricting local capabilities. We see this in the decrease in labour force participation rates over the years despite Tanzania’s economic growth trends (Figure 1.2).

Figure 1.2

Currently, the inflow of funds from Chinese organization has helped to uplift Tanzania’s economy. On the other hand, this would inevitably cause Tanzania to become reliant on Chinese financial aid. Furthermore, majority of locally owned SMEs lack the technological know-how and strategic management capabilities to prosper independently (Wang and Zhu). Thus, Tanzanian SMEs run the risk of succumbing to more successful Chinese entrepreneurs who possess the skills, experience, and resources, becoming obsolete.

Recommendations

To combat this, it is essential for Tanzanian SMEs to build up their technical and business skillsets. However, this may prove difficult for SMEs to achieve independently, given the relative informality of Tanzania’s private sector. In order to stimulate private sector growth, support from Tanzania’s authorities would be crucial.

With the support from China, the Tanzanian government is sufficiently equipped to enforce frameworks that will encourage the flow of knowledge, skills and resources between Chinese firms and local enterprises. For instance, governing authorities can consider setting up grants and policies that award Chinese firms upon partnering with a Tanzanian SME.

One successful example that Tanzania can draw from is Singapore’s implementation of enterprise development grants to uplift local businesses. As part of a national initiative, the Singaporean government launched several grants to help businesses build capabilities, innovate and internationalise (Wong). These grants supported up to 50% of eligible equipment and hardware costs alongside 70% of all other qualifying costs, including consultancy services for SMEs (“Impact of Enterprise Singapore’s Grants”). This initiative was highly successful, with improvements in firm-level outcomes. Grant recipients saw statistically significant increases in revenue and total exports of up to 5.3% and 4.4% respectively (“Impact of Enterprise Singapore’s Grants”).

Tanzania can consider implementing similar initiatives in conjunction with Chinese aid to build local business capabilities that will encourage the development of Tanzania’s entrepreneurial scene. Such initiatives would not only allow for Tanzanian businessmen to access financial resources and learn from successful Chinese counterparts but would also serve as an added incentive for Chinese investments into Tanzania, with increased capabilities to support China as well as greater investment returns.

References

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Chen, Huiyi, and Sena Voncujovi. “Tanzanian President’s Visit to China Means One Thing: Africa’s Agenda Matters.” Tanzanian President’s Visit to China Means One Thing: Africa’s Agenda Matters., The Diplomat, 8 Nov. 2022, thediplomat.com/2022/11/tanzanian-presidents-visit-to-china-means-one-thing-africas-agenda-matters/.

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Runde, Daniel F., et al. “China and SMEs in Sub-Saharan Africa: A Window of Opportunity for the United States.” CSIS, 15 Oct. 2021, www.csis.org/analysis/china-and-smes-sub-saharan-africa-window-opportunity-united-states.

Sitorus, Djauhari. “Improving Access to Finance for Smes in Tanzania: Learning from Malaysia’s Experience.” World Bank Blogs, 13 Dec. 2017, blogs.worldbank.org/eastasiapacific/improving-access-finance-smes-tanzania-learning-malaysia-s-experience.

“Statement on Sino-Tanzania Relations.” Embassy of the United Republic of Tanzania Beijing, China, 2024, www.cn.tzembassy.go.tz/about/category/sino-tanzania.

“Tanzania’s Small and Medium Enterprises (SMEs).” TanzaniaInvest, 1 May 2023, www.tanzaniainvest.com/smes.

Wang, Ke Xiang, and Yu Guang Zhu. “Chinese SMEs in Emerging African Markets: Innovative Management and Marketing Performance.” Business and Economics Journal, 2019, https://doi.org/10.4172/2151-6219.1000387.

Wong, Pei Ting. “Approval Rates of 85%, 95% for Enterprise Development Grant, Productivity Solutions Grant Schemes.” The Business Times, The Business Times, 3 Oct. 2022, www.businesstimes.com.sg/international/approval-rates-85-95-enterprise-development-grant-productivity-solutions-grant.

Xinhua. China, Tanzania Pledge to Enhance Cooperation for Greater Achievements, 24 Jan. 2024, english.www.gov.cn/news/202401/24/content_WS65b0f611c6d0868f4e8e3718.html.