The paradox of foreign direct investment

Mothusi Tshekiso - BG correspondent
Monday, 08 August 2016
The paradox of foreign direct investment

In the era of cheap money, diverging monetary and fiscal policies, investment has been robust while foreign direct investment has gravitated towards the highly developed countries rather than developing countries and transition economies.

2015 saw a recovery of FDI flow in the world, which shot to US$1.7 trillion, an increase of 38 percent. The positive outlook in 2015 was attributed largely to corporate restructuring, mergers and acquisitions, which shot to US$721billion from US$432 billion in 2014. Most of the movement had little effect on actual corporate operations but on balance of payments, hence when discounted the global increase in FDI flows was at only 15 percent. In that year, greenfield investment, where a corporation builds its operations in a foreign country, was still high at US$766 billion.

It is regrettable that the movement here has the potential to contribute to productive investments, but most of the movement was for the purpose of tax evasion where reconfigurations of corporate giants was to transfer the tax domicile of a multi-national enterprise to jurisdictions that offer lower tax rates. In the year 2015, global FDI outflows  constituted of 72 percent for the developed economies while the increase in the FDI outflows from these economies increased sharply by 33 percent to over US$1 trillion. The largest investing region by value in this year was Europe at US$576 billion in FDI outflows.

Despite transition and developing economies exhibiting a downward trend in outward FDI, the giant-in-the-east, China, did exceptionally well in that its outward FDI remained high at US$128 billion. Investment flows in offshore financial hubs remain robust. In this year, it had taken a nosedive to US$72 billion, comprising flows from multinational enterprises domiciled in developing and transition economies, often being from transit FDI. The main source of ache from this, is the disconnect between locations in which the income is generated and productive investment, which has often times resulted in fiscal losses. This then calls for increased integration in investment and tax policies at the international stage.

Buoyant cross-border mergers and acquisition sales were a big lift for developed economies as Europe saw an increase of US$504 billion, which is 29 percent of global inflows. The United Kingdom though, had a dip in inflow to US$40 billion while North America almost quadrupled to US$429 billion. The report further states that in the landlocked developing countries (LLDC), FDI flows continued on a downward trend falling to US$24.5 billion.

Will Africa ever enter the premier league of investment destinations? At the world economic forum, in May 2016, it was debated by leaders and academics alike how “Africa rising” is a phenomenon of the past. Issues that were debated on included among others, that the countries are still doing well except high growth commodity based economies which have taken a hit when the commodity price plummeted. Commodity prices were of recent dampened, with aggregate demand being persistently weak and growth being sluggish in commodity exporting countries. African investors were compelled to reduce their investments outside Africa because of weaker demand from main trading partners due to low commodity prices.

Intra-African trade has been noted to play an important role in attractiveness of Africa as a premier investment destination. There was a dismal performance for intra African trade at only 3.5 percent, but the gloomy result could turn around as it is projected that by the year 2022, intra African trade could be 22 percent of total trade. The dismal performance of intra African trade was, among others, because of heavy reliance on commodities in Africa.

The report estimates that FDI flows fell to US$54 billion comprising 7 percent fall from the previous year. North Africa was boosted by Egypt, which received increased inflows by 9 percent; West Africa fell by 18 percent to US$9.9 and East Africa by 2 percent. Southern Africa, conversely, was driven by Angola with intra company loans, which drove FDI flows to a record US$1.4 billion, an increase of 2 percent. According to United Nations Economic Commission for Africa, a continental free trade area (CFTA), would bring together trade blocs from around the continent, with a combined GDP of over US$2.5 trillion and a total population of a staggering 1 billion plus. This CFTA is expected to be in place by October 2017.

Coming closer to home, statistics show that in the Southern Africa region, FDI inflows favoured the developed and highly industrialised country, South Africa. 81 percent of all inward FDI went to the country while Botswana received a mere 7 percent. This certainly calls for a paradigm shift in the FDI policy in Botswana. Foreign direct investment: Inward flows and stock, annual, 2004-2014.

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