Foreign Direct Investment in Burkina Faso - Essay Example

Foreign Direct Investment (FDI) in BURKINA FASO Hypothesis or Proposition Foreign Direct investment is the acquisition of ownership of assets by a foreign country in another country with the intention of having direct control over manufacture, distribution, and sales of a firm in the host country. Foreign investment basically means the gap in a country’s requirement for investment and its savings rate (Huang, 1998). The host country for FDI stands to benefit in a number of ways in terms of capital formation, export diversification, technology import, management system improvement, and enhanced market competition, infrastructure development to support economic activity, financial sector growth, and markets development (OECD, 2001). FDI is a powerful engine in helping to achieve country objectives such as those about poverty reduction, development, and international integration and it is perceived to be an international investment route that most developed economies have embraced. Low income countries in Africa, for example, have not taken this advantage and are thus being excluded from the globalization benefits of FDI. This research paper seeks to support the thesis that encouraging and attracting foreign direct investment by the government of Burkina Faso is a good bet for boosting its economic growth, just like other emerging markets in Africa have benefited. Evidence Burkina Faso is a landlocked sub-Saharan country located in West Africa. Its population is estimated at more than sixteen million people. Burkina Faso experiences limited rainfall and their natural resources are minimal and therefore it is referred to as one of the poorest countries in Africa. Poor farming activities and the existing drought have ruined the environment resulting in decrease of food stuff. The main export product for Burkina Faso is cotton accounting for about 60% of the country’s total exports, or 5% of GDP (IMF, 2002). The country has limited resources and is highly prone to external vulnerabilities because its economy is heavily reliant on imports rather than exports, despite the country entering into intraregional trade liberalization agreements. Burkina Faso has embraced a number of FDI projects including those undertaken by the French, British, and certain private companies (IMF, 2002). An article by ‘The Economist’ in 2012 titled foreign direct investment stated that global inflows of FDI rose by about 17% to hit $1.5 trillion with developing economies accounting for at least half of this. The article noted that FDI inflows into Africa were on the decline in 2011 with largest decline recorded from Egypt, Tunisia, and Libya. For the developed economies, FDI growth was mainly attributed to mergers and acquisitions across border. This paper shall illustrate evidence in connection with the above thesis using examples from the Chinese, Indian, and Malaysian economies and their FDI experiences. China is the largest recipient of foreign direct investment among developing countries. An article by the Dow Jones in 2011 on India’s Foreign Investment Approach in Retail Industry stated that India holds great potential for the retail market. Foreign single brand retailers are allowed to make up to 51% direct investment in India but there are considerations to open it up to 100% and encourage such investments to decentralized locations in the country. FDI growth particularly through mergers and acquisitions has benefited China in terms of the good outcome of large current account surpluses (The Economist, 2011). A country that acquires renowned and established companies through FDI gets the advantage of introducing already marketed brands in its markets as opposed to nurturing its own brands that could take many years and substantial financial input. FDI from countries whose economies are developed is usually cheaper and provides a reliable source of financing. With a deep industry economy from various FDI projects, countries such as India and China have benefited from a growing workforce hence minimizing the problem of unemployment. China, for example, has gained a speedier access to emerging markets like India through the merger and acquisition strategy and is Jaguar Landover Range (JLR’s) fastest growing market where it manufactures the parts and ships them to India for assembly. This makes the cars in India cheaper because minimal import duty is imposed and creates job opportunities for the Indian economy (The economist, 2011). China’s successful FDI performance which has boosted capital and technology gains has been attributed to a number of policy and institutional factors such as relaxation of FDI controls entailing removal of sector and geographic bottlenecks regarding FDI projects (Huang, 1998), import substitution and excess investment demand. To explain China’s FDI success and use that information to recommend appropriate FDI approaches to other countries such as Burkina Faso, there would be need for a wider look at other areas not just government policy. Such areas may include but not limited to assessment of the level of country’s economic development, available country resources and institutional structure. India receives FDI estimated at about 5% of GDP. Some of the reasons that have been given for India’s below par performance in attracting FDI include uncertainties brought about by the September 11 attacks, global economic downturn, and lack of trade liberalization to open up ceilings and restrictions on level of foreign investments, and failure by the government to undertake comprehensive privatization programme (OECD, 2001). India also has not improved the environment for doing business by foreign investors in the country, with a range of requirements which when fulfilled are still filtered on a case by case basis. Burkina Faso should take these experiences from India seriously, evaluate them and decide on how to improve FDI policy for better results. According to a Dow Jones article, Malaysia expected a surge in foreign direct investment by about 20% in 2011 and the government engaged itself in deliberate effort through economic reform plans (Dow Jones, 2011). The minister of international trade and industry announced that Malaysia had raised its FDI target by about USD 2 billion to USD 11 billion in 2011 from USD 9 Billion in 2009. This objective was part of the Malaysian government’s economic transformation program launched in 2008 that aims to increase per capita income from USD 7,000 now to USD 15,000 by 2020, targeting that USD 450 Billion worth of investments will be achieved in 10 years and at least 20% of these will be foreign direct investments. There are certain economic and social effects that have resulted from increased FDI in Malaysia including foreign companies taking advantage of cheap labor available in the country to maximize profits simply because of government faulting the promises to improve living standards from revenues generated through FDIs. Conclusion From the forgoing, Burkina Faso is a country with enormous economic potential and it can maximize the investment gain that comes with this through FDI. In order for the Burkina Faso economy to achieve successful FDI performance, policy makers need to focus on government policies relating to trade regulation, assess the country’s economic resources, evaluate institutional structures, and begin by looking at the level of economic development that the country has achieved. Burkina Faso stands to benefit from efforts geared towards FDI expansion in that the country would be in a position to fund a large portion of its national budget from incomes generated from FDI projects thereby minimizing risks of unfunded budgetary deficits, which deprives economic growth. Burkina Faso would be assured of cheaper investments and more reliable sources of finance for its economy if it engages FDI from rich countries. Burkina Faso conventionally will have access to capital and technology by allowing FDI. Encouraging FDI would bring to Burkina Faso some of the World’s renowned brands in different industries and sectors that are cheaper for the country and beneficial to market development and economic growth in term of job creation, lower cost of doing business and improved GDP. Nonetheless, Burkina Faso should also take some caution in the fact that economic effects of high FDI inflows, whether short term or long term, have not been very well explained as in the case for China (OECD, 2001). Foreign corporations may, through FDI at the host country, continue to profit by for example taking advantage of cheap available labor at the expense of good living standards for the populace. Reference List Down Jones (2011). Factiva: Dow Jones Breaks News on Malaysias Investment Goal. Dow Jones & Company Huang, Y. (1998). FDI China: An Asian Perspective. Singapore: Institute of Southern Asian Studies IMF.(2002). Burkina Faso: Sixth Review under the Poverty Reduction and Growth Facility, and Requests for Waiver of Performance Criteria. Washington D.C.: IMF Publication services. OECD. (2001). New Horizons for Foreign Direct Investment. France, OECD Publications Serive. The Economist (2011). Role Reversal & foreign Direct Investment. The Economist Read More