Foreign Direct investment in Africa - Essay Example

Topic Part Critically evaluate the extent to which the regulatory environment and governance influence the success of countries in attracting inbound FDI Foreign direct investment (FDI) can only be vigorously pursued and enjoyed by a country if its policies enjoin entrance of investments from foreign capitals. Such is parcel of macroeconomic development of a region such as Africa. The international community of business sector or transnational companies can only view opportunities in a region not only out of evident natural resources but also of much needed policies that secure and motivate international investments. Experts profess that the purpose and beneficial outcome of FDI is fundamentally for human capital. Hence, for a nation to be in the investment map, it must necessarily improve its diplomatic relations with developed markets and to offer incentives to access investment opportunities for foreign capital (Morrisset, 2000). Economists posit that FDI can possibly be infused if a country would a bit lower its protectionist policy to improve its macroeconomic performance and permeate the increase of growth rate in its domestic economy (Harrison, 1996). This refers about the need for more effort to make a specific region more attractive for investments. It’s argued that an increase in investment auger well for sustainable economic development within the region (Harrison, 1996). Such is possible if financial resources from domestic and international finance communities are integrated within a specific region or nation which opens its borders to world economy (Morrisset, 2000). However, countries adherent to borderless economy are clothe with policies protective of foreign investors and of enhancing human capital. A country interested of maximizing FDI for economic growth must improve its system of governance and domestic economic conditions, to increase the rate of its credibility at the international scale (Aaron, 1999). Experts contend that national credibility can be earned if national leaders advocate and adapt political and economic innovation, human development, infrastructural development, and investment attractiveness (Abraham., 2005). Political innovation refers to legislation of policies that are supportive of economic liberalization, works for the removal of protectionist policies, and attracting more investments using measures such as “international incentives to invest (Anderson, Dimaranan, Francois, Hertel, Hoekman, & Martin, 2001)..” However, while these policies support international trade and foreign investment, the protective and right–based policies significant to domestic stakeholders’ interests, land utilization, and resource maximization must essentially be harmonized to accommodate foreign interest and capitals (Anderson, et.al., 2001). While policies are essential to attract FDI, government must likewise balance this with human rights’ interests; rehabilitation of utilized resource and environment; and, the exercise of corporate social responsibility (Anderson, et.al., 2001). This is the paradox of FDI-related legislated measures: it enables to foster introduction of foreign investments but on the other hand, regulates or controls to minimize the impact of investments to host countries (Akinlo, 2003). These goals to be vigorously are basically dependent on the vision and goals of a host country. On the other hand, deconstructing the economic curtains, if adhered, should be made consistent with foreign investment codes adopted with many countries and of the code of conduct amongst multinational enterprises and of intergovernmental or transnational codes (Abraham, 2005). Policies that should be crafted should be harmonized with New International Economic Order and Charter of the Economic Rights and Duties of States (Grose, 1983). Other regulatory details would include formulation of code for foreign investment, restrictions on foreign company ownership, and repatriation of profits. Policy makers must likewise be sensitive to interaction and interdependence between foreign and domestic investors (De Mello,1999; Markusen et al., 2000; Agosin & Mayer, 2000) to put sense of direction to host country’s direction of economy and its systemic relations toward genuine sustainable development (Bosworth and Collins, 1999; Aryeetey, & Udry, 2000). Foreign corporations do business with strong reliance to empirical information on research and development. Modern researches necessitate superior technology in order for them to gather leverage in the market. As such, human resource should have access to learn and use technology for proficiency (Blomstrom and Kokko, 1998). Technology has been corporation’s asset for fast production and efficiency of services. Inherent to the transition to a free-market economy and international of business interests, the host country should mature to take an active role for economic reconstruction (Bosworth et. al.,1999; Aryeetey et.al, 2000). As such, its economists must likewise study the World Bank Guidelines for the Treatment of Foreign Direct Investment to understand the states’ roles in the economic transition processes, especially on matters which necessitate constitutional amendments to accommodate liberal foreign investment, such as matters relating to foreign capital shares in the corporate investments and ownership or those possible tax exemption that goes along as investment incentives (Diaz & Ferrate, 1995). Other concerns will possibly include recommendatory measures such as (a) elimination of custom duties; (b) unrestricted repatriation of dividends, profits and income of foreign employees; (c) freedom to hire alien executives and technical experts; (d) management of labors forces which may include prohibition to strike and low wages; (e) availability of government assistance inclusive of legal, accounting, and economic matters; (f) and state-based insurance to cover loss of profit in case of accident, non-payment for retailed commodities and/or non-fulfillment of contracts due to political condition of the host country (Diaz et.al., 1995; Asiedu, 2002a; Asiedu, 2002b). Anent to that are also significant contractual matters which will revolve around business organization, such as joint venture administration where foreign partner provide financial capital but assets are mostly provided by the domestic businessmen of the host country (Diaz et.al., 1995; Asiedu, 2002a; Asiedu, 2002b).Such will also include issues on production agreement, labor, facilities, materials and potential credits, as well as, about establishment of joint accounts (Grose, 1983).The host country must likewise establish an institution mandated to supervising and receiving foreign investment application. Moreover, a country must likewise improve the capacity of its human resources by attuning educational system and alternative training centers to the needs of multinationals or transnational corporations (Basu, & Srinivasan, 2002). Enhancing the skills of manpower through formal and informal education increase workers’ productivity level and therefore entice corporations’ appreciation to knowledgeable and skilled workers’ capability for productive output (Harrison, 1996). Depending on the political and economic maturity of the host country, there are still necessary FDI regulations that must protect the country from possible exploitative business relations. Measures can be adapted using procedures to regulate partnership and venture relations, rules on property ownership, labor relations, as well as on governing frameworks that will standardize processes of authorized investments (Bende-Nabenfe, 2002). The democratization of region’s polity and liberalization of its economy auger well in successfully putting a country at an investment map and ascend the country’s image to international economic arena as it would opt to open its doors for agro-industrial development. Part 2: Case Study  1. Why has Africa done less well than other regions in attracting FDI? Economic analysts pointed that as African tried economic reforms by improving its regulatory frameworks for FDI, thus, opening its economy for foreign market, allowing profit repatriation, and offering tax incentives to foreign capitalists to attract investment (Bhattacharya, Montiel, & Sharma, 1997).This is evident amongst 32 developed nations in Africa where 26 of them are already bearing liberal political and economic governance for the repatriation of dividends and capital (UNCTAD, 1997). There are also related developments in relevant areas that are significant for FDI climate, such as the adoption of trade liberalization policy; fortifying the rule of law, and advancing telecommunications and transportation infrastructure (World Bank, 2003). As financial analysts predicted that Africa has wider attractiveness for foreign investments, there are still major factors which hinder the continent of Africa to embrace economic liberalization. One, African leaders have strong sentiment for nationalism. For them, liberalization and internationalization of its economy may in the long run lose its political sovereignty; marginalize its domestic firms and economy as they lacked capability to compete in the wider market; and the utilization of its resources and environment will have negative impact to its regional economy (Moss, Ramachandran, & Shah, 2004). Second, Moss, et.al. (2004) contend that Africans are skeptics about foreign investment because they are fundamentally ruled by their strong adherence to its history, ideology, and politics in the post-independence period. Third, regional leaders likewise believe that while the entry of foreign direct investment will potentially benefit its human capital and its continent, there is however a wider perception which contends that FDI has larger negative effects than the perceived benefits (Moss, et.al.,2004; Basu, & Srinivasan, 2002). The latter is sourced from accounts of experiences from emerging nations that are clearly becoming reliant to foreign capital in a neo-liberal system of governance (Bende-Nabenfe, 2002). Unlike East Asian country, where substantive entry of FDI benefit the secondary sector and therefore enriched the diversification of import and export relations to sustained growth, Africa maintained the FDI at the level of the primary sector, hence, development is not quite significant (Bende-Nabenfe, 2002). Indeed, Africa is challenged about how to maximize those multinational companies who have openly expressed eager interest to invest in Africa. Investors who have professed its entry for investments are those engaged for consumer products, construction, telecommunications, financial services and mining and metals – which was forecasted by economist and financial analyst as potential sources to increase its gross development product from $1.6 trillion in 2008 to $2.6 trillion by 2020 (Ohuocha, 2011). However, other than its strong protectionist policies and resistance to foreign economic control, Africa is also region which is severely confronted with economic depression, violent armed conflicts, wobbly political regimes, increasing social and health problems, e.g. malnutrition, prevalence of AIDS, lack of access to water, education, and other fundamental social services (World Economic Forum, 2000; Moss et.al., 2004). This is the fourth reason why Africa has done less to attract more FDIs in the region. The instability within the region is characterized by increasing incidences of wars, recurrent political interference of the military and tribal conflicts (World Economic Forum, 2000; Moss et.al., 2004). This violence in the region has direct correlation to poor FDI investment within the area. Although some nations in Africa are relatively better situated and are considered as highly relevant for foreign direct investors, but such be dealt in a differentiated way. The diversity of 50 nations within African continent, which differ with its socio-political-economic systems, may encourage differentiated models in the maximization of FDI for Africa (World Trade Organization, 2005; Diaz, & Ferrate,1995). This is to note that a number of African countries have commenced economic reforms by increasing the role of the private sector in national economic activities by assuming lead role in managing the privatized formerly state-owned corporations (WTO, 2005; Diaz, et.al.,1995). Such participation assuaged the restoration of macroeconomic stability by devaluating the overvalued national currencies and the subsequent decrease of inflation rates and budget deficits (UNCTAD, 1998a, p. 124; UNCTAD, 2004; UNCTAD, 2003). However, albeit these developments, the fluid macroeconomic conditions also contributed to African’s leaders’ cynicisms to foreign investments infusion in their countries. These instability in macroeconomic is illustrated by international economic depression; inflation of commodities affecting import-export relations; and budget deficits burgeon akin to increasing foreign debt of African nations. This fifth reason is further exacerbated by lack of political and policy transparency (Morrisset, 2000). The latter is significant because of evident increasing transaction costs, further encouraged by corruption and red tape within the systems. Some investors call this inhospitable regulatory environment. This is also backed by the sad reality that the region has poor growth development product since its domestic market isn’t a competitive as other developing nations (Morrisset, 2000; Diaz, et.al.,1995). As this meant poor economy and lack of strategizing its market, such explained the lack of infrastructure developments to cater social needs. It’s these reasons made investors think that Africa is a high-risk region for capital investment. 2. What policies can be put in place to enhance FDI flows to Africa? The 54 countries which make up Africa have so much to explore too about how to maximize FDI. In case they’d adapt major economic reforms via liberalization, they needed to restudy the impact of economic internationalization authored by the World Trade Organization (WTO) (Morrisset, 2000; Diaz, et.al.,1995). They need also to evaluate and weigh the significance of trade-related investment measures (TRIMs), the General Agreement on Trade in Services (GATS), the Agreement on Subsidies and Countervailing Measures and trade-related intellectual property rights (TRIPs), as well as, the foreign investment issues (WTO, 2005; WEF,. 2000). In case some of the statutes and policies proved detrimental and discriminatory for the region, its group of economists and financial analyst must and can still impartiality look into potential investment measures to correct the discriminatory provisions thru treaties and agreements relating to international trade relations (WTO, 2005; WEF,. 2000). Learning all these are essential to rebuild confidence and in building consensus amongst African nations about their understanding on economic globalization and its related dimensions. While there is recognition about some infrastructure developments in some part of the region, there are still so many actions that they must institute internally. To attract FDIs, African has to undertake the following internal measures (Abraham, 2005; Diaz, et.al., 1995; Harrison, 1996; WTO, 2005; WEF,. 2000; Anderson et.al., 2001) a. Improve its dismal situation by nurturing political instability and upholding the primacy of peace-building measures toward peaceful community and responsible governance; b. Improve and strengthen the domestic market and its business sectors by capacitating them on business management strategies; c. Upholding the rule of law and property rights to encourage business climate suitable for both domestic and international investments. The region must also encourage diversification of its economy as protective measures against the volatile market; d. Legislation of policies that will vigorously change the economic paradigm of African nations that will adopt open trading and market-oriented policies amid developing trading opportunities in the international scale. Such may include amendatory laws that will remove protectionist policies and will support agro-industrial developments; e. Review the potential privatization of unproductive and incompetent state-owned corporations to decrease fiscal deficits and encourage the private-public interrelations or partnerships. It must also encourage civil society’s participations in decision-makings relating to economic internationalization; f. Encourage regional integration and organization of business sectors to strengthen business sector participation for economic reforms; g. Promotion of good and transparent governance by reducing corruption within the bureaucracies to improve the investment climate; Encouraging more infrastructure development and business sector cooperation to improve communications, transportation, energy generation and improving social services. The presence of these facilities and social services will lessen the operational costs for business investor, thus improved business and trading relations within the region (Abraham, 2005; Diaz, et.al., 1995; Harrison, 1996; WTO, 2005; WEF,. 2000; Anderson et.al., 2001) At the international scale, the African countries need to do the following (Abraham, 2005; Diaz, et.al., 1995; Harrison, 1996; WTO, 2005; WEF,. 2000; Anderson et.al., 2001) a. Review and reevaluate the creation of the African Growth and Opportunity Act (AGOA) facilitated by the United States in 2000 and how this structure assisted the establishment of access for petroleum products, agricultural supplies, and other manufactured products such as textiles. Promote how this assisted in nurturing the import-export relations in the countries of Madagascar, Nigeria, Gabon, South Africa, Lesotho, and Swaziland. The best practices in these relations to support more potential benefits it can provide in the region. b. Reassert the prioritization of economic and social developments in the region instead of arm trades. This has been started by the European Union in its “Everything-but-Arms” program in 2001. Poverty is best negotiated with economic development and provision of opportunities for human capital instead of making them slaved of violent convictions. c. Educate African leaders about the World Trade Organizations (WTO) and how they successfully operate in other emerging countries by extolling its best practices and the responses of other nations availing FDI for economic growth. There is also a need to review how nations adopting borderless economy utilize development frameworks which reduce trade barriers but at the same time uphold responsible corporate management and operation within its respective countries. It’s significant that mutual benefit is enjoyed in bilateral or multilateral relations (Abraham, 2005; Diaz, et.al., 1995; Harrison, 1996; WTO, 2005; WEF,. 2000; Anderson et.al., 2001; Aryeetey et.al., 2000 ; Bende-Nabenfe, 2002; Yeaple & Golub). References Diaz, Matias F. & Ferrate,Alejandro, 1995, Recommended Features of a Foreign Investment Code for Cuba’s Free- Market Transition. Cuba in Transition. Accessed: ttp://www.ascecuba.org/publications/proceedings/volume5/pdfs/FILE16.pdf. Nov. 14>, 2011. pp. 209-226. 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