FDI over foreign aid and external borrowing

1. Technology and Skill transfer: FDI brings new technology to its

host country. These technologies also bring production
machines and even the knowledge of production system of
the technology that FDI brings.
2. Employment Generation: Most of the African countries suffer
from very high unemployment or underemployment. FDI is a
major source of employment.
3. Privatization and commercialization: African government sees
FDI as the major source to privatize the state owned
enterprises. Most of the privatized enterprises are very capital
intensive and sees high infusion of capital to the country.
4. Conservation of foreign exchange: As the FDI invest from the
foreign countries thus encouraging flow of foreign exchange to
the host country and boosting their FOREX.
5. Backward and forward linkage: FDI helps to encourage linkage
between local economy and thus encourage new economic
activates.
Backward linkage takes place when FDI encourage the
emergence of local firms that supply foreign investor with
goods and services. E.g. establishment of supermarket results
in demand of agro-processed goods.
Forward linkage takes place when a firm produces goods or
service that is then used by other firms. E.g. investment in oil
and gas production results in petrochemical industry.
6. Crowding in of private and public investment. FDI could
encourage domestic investment if foreign investors
collaborate with local investor to establish and operate
business ventures locally.
7. Infrastructural investment: Foreign investment can helps in
infrastructure development in the country. Rather than waiting
for the government to build roads, telecommunication, etc.
FDI industries can help the host country to establish these
infrastructure so that to operate in that country and also
helping the host country to betterment of its infrastructure.
8. Corporate social responsibility: CSR is a belief that
organization can contribute to the development of the
communities in which they are located along with maximizing
their profit and wealth. CSR has become a central mission of
many corporations thus increasing the inflow of FDI capital to
the development of community in Africa.

FDI policy in Africa

African countries have brought up many policies to attract FDI, they
are:
1. Regulation
2. Economic policies
3. Institutional reforms
4. Incentive
Regulation
Many African countries have simplified their regulations in order to
make investment climate more open, attractive and transparent.
E.g. many countries have made it easier for investors to obtain visa
at the airport and allowing easy return of profits. African countries
have signed to bilateral investment treaties(BIT). One of the goals of
BIT is to provide more transparent and safe environment for the
investors. They also seem to enhance the mutual understanding and
reduce mutual area of friction between signatory countries.
Also African countries have signed double taxation treaties that
exempt companies doing business in one country from paying taxes
to other signatory countries.

Economic policies
From 1980s, African countries started moving from statist(state
should control either economic or social policy, or both, to some degree)
policies in favor of private sector driven economy. Some of the
policies that they have implemented are removal of price control,

privatization of state owned enterprises, cuts in budget deficits,

abandonment of fixed foreign exchange rate regimes, trade
liberalization and freeze employment in public sector thus to free
workers to work in private sector.

Institutional Reforms
Previously, African countries lacked the effective legal system to
enforce contracts. But recently most of the African countries have
taken many legal reforms to protect the business of private sector
and also private investment. Democratization has also led to
strengthen the law and lessened the uncertainties of military
regime.
Incentive
African countries offers a various type of incentive to the foreign
investors, they are:

FDI in Africa : magnitude, trends and implication

In 2003, Africa FDI inflow was $600 billion, but jumps to $2 trillion in
2007. But due the global financial crisis, in 2009 it decreased to
$1.2 trillion but again has starting good progress from 2011.

Distinctive nature of FDI in Africa

1. Low employment intensity: Despite of high inflow of FDI in
Africa, the rate of unemployment is still high. This is because
most of the FDIs are in capital-intensive sector like mining,
mineral extraction, etc.
2. Weak value creation: Most of the FDIs are in mineral
extraction, and their raw extracted forms are exported and
processed in the foreign countries, thus weakening the value
of African industries.
3. Little or no R&D: African countries attract very few science
and technological related FDI. This is because most industries
see Africa as a market for the processed goods or a center of
the raw material or natural resource. Foreign firms in Africa
are more inclined to undertake the R&D activities in their
parent country; they do so to protect their intellectual
property rights which most of the African countries lacks in.
4. Low reinvestment rate: It has been seen that investors are
least likely to reinvest in Africa because of their uncertain
economy and political reality.
5. Greenfield vs brownfield FDI: A big proportion of FDI in Africa
are privatized firms or brownfield FDI. As this type of
investment involves taking over the state owned enterprises
with less investment and thus FDI inflow is lesser into the host
country. On other hand, greenfield FDI is investment from the
ground level of establishing industry to its completion.
Determinants of FDI flows:
1. GDP growth rate: It has been found that GDP growth is directly
proportional to FDI investment.
2. Inflation rate: Inflation increases the user cost of capital thus
affecting FDI in negative way. It reflects poor economic
condition of the country thus discouraging FDI to invest.
3. Real interest rate: A low real interest rate suggests political
instability and thus discourages FDI to invest.

4. Openness of the economy: the ease with which the investor

can move money in and out of the country also determines
the flow of FDI.
5. International reserves: Foreign investors see large
international reserve a stable local economy thus wants to
invest in that particular region.
6. External debt: debt shows the negative aspect of the countries
economy, which discourages FDI.
7. Taxes: The nature of countrys taxation law shows its ability to
attracts or retains foreign investor. A unlikely taxation law will
discourage foreign investment.
8. Political rights: Democratic and politically stable countries
attract more FDI as they respect the rule of law and property
rights.
9. Infrastructure: Foreign investors prefer economy with a well
developed infrastructure like roads, communications, etc. as
production cost is lesser in countries with well developed
infrastructure.
10.
Natural resource availability: Foreign investors likes to
invest more in the country with abundant natural resources,
as it will decrease their cost of production.
Idiosyncratic determinants of FDI in Africa
There are many factors that discourage FDI in Africa, they are:
1. Africa image problem: Despite of many economy, institutional
and political reforms, the image of Africa in worlds eye is still
bad, they still see it as the nation with wars, diseases,
starvation, etc. So, to encourage the inflow they not only need
to improve their good economic policies but also banish their
bad image.
2. Uncertainties about the future: African economy seems to
have uncertain future thus discouraging investors to invest
there.
3. Cost of doing business: Cost of doing business in Africa is very
high as there are less habitable area and also there are few
skilled labour which are also expensive on other hand.
4. Low per capita income and smaller market: Low per capita
income shows the less purchasing power of the people, thus
FDI are less likely to invest in these countries as they will have
very small market size to sell their goods.

WTO

GeneralAgreementontrade&tariff(GATT):TheGeneralAgreement
onTariffsandTrade(GATT)wasamultilateralagreementregulating
internationaltrade.Accordingtoitspreamble,itspurposewasthe
"substantialreductionoftariffsandothertradebarriersandtheelimination
ofpreferences,onareciprocalandmutuallyadvantageousbasis."TheWTO
wasbornoutoftheGeneralAgreementonTariffsandTrade(GATT),
whichwasestablishedin1947.Aseriesoftradenegotiations,GATTrounds
beganattheendofWorldWarIIandwereaimedatreducingtariffsforthe
facilitationofglobaltradeongoods.
MostFavouredNationRule(MFN):Acountrygrantsthisclauseto
anothernationifitisinterestedinincreasingtradewiththatcountry.
Countriesachievingmostfavorednationstatusaregivenspecifictrade
advantagessuchasreducedtariffsonimportedgoods.UndertheWTO
agreements,countriescannotnormallydiscriminatebetweentheirtrading
partners.Grantsomeoneaspecialfavour(suchasalowercustomsdutyrate
foroneoftheirproducts)andyouhavetodothesameforallotherWTO
members.

Uruguayroundoftradenegotiations(19861994):TheUruguayRound
wasthe8throundofmultilateraltradenegotiations(MTN)conducted
withintheframeworkoftheGeneralAgreementonTariffsandTrade
(GATT),spanningfrom1986to1994andembracing123countriesas
"contractingparties".TheRoundledtothecreationoftheWorldTrade
Organization,withGATTremainingasanintegralpartoftheWTO
agreements.ThebroadmandateoftheRoundhadbeentoextendGATT
traderulestoareaspreviouslyexemptedastoodifficulttoliberalize
(agriculture,textiles)andincreasinglyimportantnewareaspreviouslynot
included(tradeinservices,intellectualproperty,investmentpolicytrade
distortions).TheRoundcameintoeffectin1995withdeadlinesendingin
2000(2004inthecaseofdevelopingcountrycontractingparties)underthe
administrativedirectionofthenewlycreatedWorldTradeOrganization
(WTO).
ThemainobjectivesoftheUruguayRoundwere:
toreduceagriculturalsubsidies
toliftrestrictionsonforeigninvestment,and
tobegintheprocessofopeningtradeinserviceslikebankingand
insurance.
Theyalsowantedtodraftacodetodealwithcopyrightviolationand
otherformsofintellectualpropertyrights.
161countriesinWTO
ExceptionsofMFN:
1.Membercountriesareallowedtogranttradeconcessionstodeveloping
countries.
2.Tradingblocksforregionalintegrationblocks
3.EU:TheEuropeanUnionreservestherighttoadoptormaintainany
measurethataccordsdifferentialtreatmenttocountriesderivingfroma
specificprovisionfoundineconomicintegrationagreementstowhichthe
EuropeanUnionisaPartyandaccordingtowhichtheEuropeanUnionmay
amendanymeasureonlytotheextentthattheamendmentdoesnotdecrease
theconformityofthemeasure,asitexistedimmediatelybeforethe

amendment,withobligationsonmarketaccess,nationaltreatmentandmost
favourednationintheseeconomicintegrationagreements.
4.NAFTA:NAFTAexemptsfromtheMFNobligationandadvantage
accordedunderataxagreement.
TheNAFTAprovisionsdonotapplytoanytaxationmeasuresinexistence
atthetimethatNAFTAcameintoeffect(1January1994).
TheNAFTAprovisionsdonotapplytotherenewaloranyamendmentofa
taxmeasurethatdoesnotdecreaseitsconformity.
TheNAFTA,providesanexceptionfor"anynewtaxationmeasureaimedat
ensuringtheequitableandeffectiveimpositionorcollectionoftaxesand
thatdoesnotarbitrarilydiscriminatebetweenpersons,goodsorservicesof
thePartiesorarbitrarilynullifyorimpairbenefitsaccordedunderthose
Articles."
5.RuleofOriginAfricanGrowth&OpportunityAct(AGOA2000):
(1)preferentialtarifftreatmentinaccordancewiththeGSP;
(2)multilateralnontariffpreferencesnegotiatedunderGATTauspices;
(3)multilateralarrangementsamonglessdevelopedcountries;and
(4)specialtreatmentoftheleastdevelopedcountriesinpreference
programs.
BenefitsofMFN:
1.Increasestradecreationanddecreasestradediversion.
2.Allowssmallercountriestoenjoybenefitsreservedforlargecountries.
3.Simplifiestariffs&tradeproduces.
4.MFNpreventsdomesticinterestagainstprotectionisttendencies.
MFNstatusiscriticallyimportantforsmalleranddevelopingcountriesfor
severalreasons.Itgivesthemaccesstothelargermarket.Itlowersthecost
oftheirexportssincetradebarriersarethelowestgiven.Thatmakestheir
productsmorecompetitive.

Thecountry'sindustrieshaveachancetoimprovetheirproductsasthey
servicethislargemarket.
Theircompanieswillgrowtomeetincreaseddemand.Theyreceivethe
benefitsofeconomiesofscale.That,inturn,increasestheirexportsand
theircountry'seconomicgrowth.
Italsocutsdownonredtape.Differenttariffsandcustomsdon'thavetobe
calculatedforeachimportsincetheyareallthesame.
Bestofall,itreducestheilleffectsoftradeprotectionism.Eventhough
domesticindustriesmaynotliketolosetheirprotectedstatus,theywill
becomehealthierandmorecompetitiveasaresult.
WTO&GlobalBusiness:
1.Cutsthecostofdoingbusinessinternationally.
2.Simplifyingtariffs.
3.Lowertariffs.
4.Nondiscrimination
5.Minimumstandardsforgoods.
6.Cutlivingcosts&raiselivingstandards.
The10benefits
1.Thesystemhelpspromotepeace
2.Disputesarehandledconstructively
3.Rulesmakelifeeasierforall
4.Freertradecutsthecostsofliving
5.Itprovidesmorechoiceofproductsandqualities
6.Traderaisesincomes
7.Tradestimulateseconomicgrowth
8.Thebasicprinciplesmakelifemoreefficient

9.Governmentsareshieldedfromlobbying
10.Thesystemencouragesgoodgovernment
AgreementontradeRelatedAspectsofIntellectualPropertyRights
(TRIPS):
Privaterights
Copyrights&relatedrights
Trademarks
Industrialdesigns
Patents
Layoutsdesigns