Investment Opportunities in Rwandan Special Economic Zone - Case Study Example

COUNTRY RISK ASSESSMENT Name Institution Course Professor Date COUNTRY RISK ASSESSMENT Rwandan Special Economic Zone The progressive economic development in Africa provides a viable market for international investment. Countries within the continent are rapidly upgrading from the undeveloped states to become economic powerhouses. According to Iimi, Humphrey and Melibaeva (2015, p. 2), a majority of the countries in Africa with the example of Rwanda manage to establish agglomeration economies by strategically locating firms in specific geographical regions. The special areas include urban sectors or industrial zones that enhance the proximity to infrastructure as well as direct access to labour. Iimi et al. (2015, p. 2) explain that the strategic locating of companies aims at increasing productivity, reducing the cost of trade and transactions. Based on Iimi et al. (2015, p. 2), Rwanda experiences strong and steady economic growth following its agricultural sectors and contributions by the government to boost the industrial sector. Figure 1 illustrates the economic performance of Rwanda by according to the major sectors. Through the government, the country established Special Economic Zones (SEZ) such as the Kigali Free Zone (KFZ) to provide focal points to serve both the domestic and regions markets (Iimi et al. 2015, p. 3). The SEZ in Rwanda target industrial sectors of mining, trade, agribusiness, and information and communication. The location of SEZ concentrates in Kigali which is the capital of Rwanda. Suitability of the location includes its huge population of 1.1 million people (Iimi et al. 2015, p. 4). Moreover, the infrastructure of Kigali promotes the concentration of enterprises about these regions with 75% of the new businesses locating in the capital (Iimi et al. 2015, p. 4). Figure 2 and 3 identify the concentration of businesses in Kigali compared to other regions of Rwanda. Figure 2. Registered Business by province, 2011 Figure 3.New firms established in 2009-13 The Rwanda Special Economic Zones (RSEZ) in collaboration with the government and other private companies manage the SEZ as a joint venture (Hitimana, 2012, p. 1). According to Hitimana (2012, p. 1), the government owns 30% of the SEZ, with the remaining 70percent shared among the Rwanda Bank of Development (BRD), RSEZ, public institutions, Bond Trading, and other privatised firms. The development of RSEZ included stages with the first phase settling on 98hectares of land while the second phase developing the 175 hectares (Hitimana, 2012, p. 1). The design of the project includes the division of the land into plots of between 2,000 square meters (sqm) and 3,200sqm with the cost of construction of Rwf 20, 000 per sqm (Hitimana, 2012, p. 1). The imperative of the project involves its ability to attract investors from neighbouring countries of Kenya and Uganda as well as international with the examples of China and India. Hitimana (2012, p. 1) includes that the international investors account for 30percent of the RSEZ with the larger percentage being Rwandese companies. The mode of entry in these RSEZ includes a booking process where the potential investor pays a 30percent of the total cost as down payment with the remaining 70% paid over a span of 5years. With the down payment, the investor gains a three-year grace period to set up the firm. The advantage of these RSEZ in attracting investors is their interest rate of 10percent which is considerable amount relative to other countries (Hitimana, 2012, p. 1). RSEZ includes a variety of zones with varying eligibility as well as different activities. According to Government of Rwanda (2010, p. 15), the available zones include the Export Processing Zone (EPZ), Free Trade Zones (FTZ), and Single Enterprise Export Processing Zone (SEEPZ). The acceptable activities in either one of these zones involve a spectrum of policies ranging from a narrow set of activities to flexible and broader activities (Government of Rwanda, 2010, 15). Comparatively, the eligibility into one of these zones varies based on performance with the examples of strict performance requirement, no requirement, and performance incentives (Government of Rwanda, 2010, 15). It is important to include the type of ownership available in these RSEZ where Government of Rwanda (2010, p. 19) provides three categories of public, private, and a partnership of the public and private sectors. Investment Opportunities in RSEZ The availability of the RSEZ attracts international participants such as China and India. Focusing on the contribution by China, especially by entering these economic markets, contribution to the infrastructural development and growth of the manufacturing industry, it is possible to identify positive advantages and investment opportunities in RSEZ. Based on Gu and Carty (2014, p. 61), the presence of China in Rwanda primarily aims at accessing the consumer markets and gain a political support. The imperative is the capitalism political ideology that allows China to provide long-term investment commitments such as infrastructure development. The success of China in Rwanda follows the availability of national interests that match the goals of Chinese investors (Gu & Carty, 2014, p. 61). The examples of pointers of opportunities identified by the Chinese firms include the availability of a strong government, reform on policies that encourage investment, and availability of a vision incorporated in the national development strategy (Gu & Carty, 2014, p. 61; Byusa, 2010, p. 68). The initiatives employed by Rwanda towards the facilitation of active engagement of the investors with the government have been crucial in attracting Chinese projects such as infrastructural development through the China Road and Bridge Corporation (CRBC) (Gu & Carty, 2014, p. 62). In particular, the inclusion of business personalities in its delegation in China as well as the creating the Rwanda Development Board office in Shenzhen facilitates a direct negotiation and setting agreement with stakeholders. According to Gu and Carty (2014, p. 62), the availability of such negotiation and consultation fronts enhances the availability of opportunities and the enactment of policies favouring investment. The political events in Rwanda including the genocide led to a significant gap in its economic development influencing the need to attract international investment to alleviate the situation. Based on Byusa (2010, p. 71), the situation in Rwanda necessitated the need for new and well-developed roads, hospitals, office, school buildings, hospital, office buildings, information, and power systems. It is the availability of these opportunities that CRBC managed to penetrate the Rwandese markets. According to Gu and Carty (2014, p. 62), CRBC has been functional in Rwanda for over 30 years managing to rehabilitate and build a new road. The examples of its success in Rwanda include building the Kigali Rusumo Highway (162km, completed in 1977), the Parliament House Kininia Road (3.5km), the Kinyinyia Textile Mill Road (2.6km), the Rusizi Rubavu Highway (66km at US$116 million) and the Kigali Genocide Memorial Centre Road (Gu & Carty, 2014, p. 62; Iimi et al. 2015, p. 6; Byusa, 2010, p. 75). Advantages and Disadvantages of RSEZ The process of establishing CRBC in Rwanda highlights of the specific challenges and advantages of making a Foreign Direct Investment (FDI) in RSEZ. Focusing on the company’s role in the country, CRBC functioned as a manufacturing firm requiring the availability of raw materials. However, Ying and Teng (2017, p. 1) and Hitimana (2012, p. 1) mention of the expensive cost of raw materials in Rwanda along power cuts as factors limiting the development of the industrial sector in the region. Gu and Carty (2014, p. 63) include communication challenges due to language barriers, a limited population of skilled labour, and challenges of accessing cost-effective raw materials. Moreover, the geographical location of Rwanda makes it a landlocked country interpreting to long distance movement of goods into and out of the country which limits the attractiveness of the regions to investors (Gu & Carty, 2014, p. 64). As a landlocked country, the price of materials both raw and finished is relatively higher interpreting to disadvantage in market competition. The characteristics of Rwanda including its policies and development initiative make it a viable market that encourages FDI. Based on Hakizimana (2015, p. 3), according to a study by World Bank, Rwanda ranks at position 52 out of 185 countries. Moreover, its overall performance in the economy makes it the most performing country in East Africa and third in position in regard to the ease of doing business within the Sub-Saharan region (Cullen, 2014. p. 52; World Bank; International Finance Corporation, 2013. p. 1). Similarly, Ying and Teng (2017, p. 1) make a comparison of its economic performance indicating an improvement in performance from position 158 in 2005 to 62 in 2016 in a study involving 189 economies. The improvement in its economic performance follows the initiative by the government to include incentives including a tax exemption on machinery and raw material imports (Hitimana, 2012, p. 1). Moreover, there is a 30percent exemption on investors entering the RSEZ. Contributing to the success of firms such as CRBC is the availability of a tax discount of up to 3% on export goods generating $3 to $5 million of tax (Hitimana, 2012, p. 1). The success of international investors in Rwanda including the examples of the CRBC with over 30 years in the country is a major outcome of the presence of an effective economic framework (Kimanuka, 2009, p. 12; Cullen, 2014. p. 55). The framework provides sound economic strategies governed through efficient policies that direct the relations between the government, the investor and other stakeholders. Moreover, the framework ensures that the investors work in a conducive environment where profits generation occur along the development of the country. Therefore, the FDI decision by China, especially the CRBC to engage in a manufacturing project in Rwanda is an incredible idea whose success indicates the advantages of RSEZ. References Byusa, V., 2010. Chinese external assistance to Rwanda. Rwanda Journal, vol. 19, no. 1, pp.66-83. Cullen, C.L.J., 2014. Foreign direct investment into Africa and the role of taxation: a case study of Ghana and Rwanda, with a focus on the influence of taxation incentive policies and regulations currently in force (Doctoral dissertation, University of Cape Town). Government of Rwanda., 2010. Special Economic Zone Policy. [online] Available at: http://www.minicom.gov.rw/fileadmin/minicom_publications/policies/SEZ_Policy_Cleaned_.pdf [Accessed on 11th May. 2017]. Gu, J. and Carty, A., 2014. China and African Development: Partnership not Mentoring. IDS Bulletin, vol. 45, no.4, pp. 57-69. Hakizimana, J., 2015. The Relationship between Foreign Direct Investment (FDI) and GDP Per Capita in Rwanda. Hitimana, B., 2012. Bridging trade deficit. [online] Available at: http://ugnew.independent.co.rw/news/regional-news/5597-bridging-trade-deficit [Accessed on 11th May. 2017]. Iimi, A., Humphrey, R.M. and Melibaeva, S., 2015. Firms? locational choice and infrastructure development in Rwanda. Kimanuka, O., 2009. Sub-Saharan Africa’s Development Challenges: A case study of Rwanda’s post-genocide experience. New York, NY: Springer. World Bank; International Finance Corporation. 2013. Doing Business 2014 Economy Profile: Rwanda. [online] Availableat:https://openknowledge.worldbank.org/handle/10986/18880 [Accessed on 11th May. 2017]. Ying, Q. and Teng, J. X., 2017. China Investment Central to Rwanda's Return after Genocide. [online] Available at: http://www.caixinglobal.com/2017-04-17/101079049.html [Accessed on 11th May. 2017]. Read More