FDI Over Foreign Aid and External BorrowingF

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FDI over foreign aid and external borrowing

1. Technology and Skill transfer: FDI brings new technology to itshost country. These technologies also bring productionachines and even the knowledge of production syste of

the technology that FDI brings.!. "ployent #eneration: $ost of the %frican countries su&er

fro very high uneployent or undereployent. FDI is aa'or source of eployent.

(. )rivati*ation and coerciali*ation: %frican governent seesFDI as the a'or source to privati*e the state ownedenterprises. $ost of the privati*ed enterprises are very capitalintensive and sees high infusion of capital to the country.

+. ,onservation of foreign exchange: %s the FDI invest fro theforeign countries thus encouraging -ow of foreign exchange tothe host country and boosting their F/"0.

. 2ackward and forward linkage: FDI helps to encourage linkagebetween local econoy and thus encourage new econoicactivates.2ackward linkage takes place when FDI encourage theeergence of local 3rs that supply foreign investor withgoods and services. ".g. establishent of superarket resultsin deand of agro4processed goods.Forward linkage takes place when a 3r produces goods orservice that is then used by other 3rs. ".g. investent in oiland gas production results in petrocheical industry.

5. ,rowding in of private and public investent. FDI couldencourage doestic investent if foreign investorscollaborate with local investor to establish and operatebusiness ventures locally.

6. Infrastructural investent: Foreign investent can helps ininfrastructure developent in the country. /ather than waitingfor the governent to build roads7 telecounication7 etc.FDI industries can help the host country to establish theseinfrastructure so that to operate in that country and alsohelping the host country to betterent of its infrastructure.

8. ,orporate social responsibility: ,S/ is a belief that

organi*ation can contribute to the developent of thecounities in which they are located along with axii*ingtheir pro3t and wealth. ,S/ has becoe a central ission ofany corporations thus increasing the in-ow of FDI capital tothe developent of counity in %frica.


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FDI policy in %frica

%frican countries have brought up any policies to attract FDI7 theyare:

1. /egulation!. "conoic policies(. Institutional refors+. Incentive

/egulation

$any %frican countries have sipli3ed their regulations in order toake investent cliate ore open7 attractive and transparent.".g. any countries have ade it easier for investors to obtain visaat the airport and allowing easy return of pro3ts. %frican countrieshave signed to bilateral investent treaties92IT. ne of the goals of 2IT is to provide ore transparent and safe environent for theinvestors. They also see to enhance the utual understanding andreduce utual area of friction between signatory countries.%lso %frican countries have signed double taxation treaties thatexept copanies doing business in one country fro paying taxes

to other signatory countries.

"conoic policies

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privati*ation of state owned enterprises7 cuts in budget de3cits7abandonent of 3xed foreign exchange rate regies7 tradeliberali*ation and free*e eployent in public sector thus to freeworkers to work in private sector.

Institutional /efors

)reviously7 %frican countries lacked the e&ective legal syste toenforce contracts. 2ut recently ost of the %frican countries havetaken any legal refors to protect the business of private sectorand also private investent. Deocrati*ation has also led tostrengthen the law and lessened the uncertainties of ilitaryregie.

Incentive

%frican countries o&ers a various type of incentive to the foreigninvestors7 they are:


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FDI in %frica : agnitude7 trends and iplication

In !


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Distinctive nature of FDI in %frica

1. >ow eployent intensity: Despite of high in-ow of FDI in%frica7 the rate of uneployent is still high. This is because

ost of the FDIs are in capital4intensive sector like ining7ineral extraction7 etc.

!. ?eak value creation: $ost of the FDIs are in ineralextraction7 and their raw extracted fors are exported andprocessed in the foreign countries7 thus weakening the valueof %frican industries.

(. >ittle or no /@D: %frican countries attract very few scienceand technological related FDI. This is because ost industriessee %frica as a arket for the processed goods or a center ofthe raw aterial or natural resource. Foreign 3rs in %frica

are ore inclined to undertake the /@D activities in theirparent countryA they do so to protect their intellectualproperty rights which ost of the %frican countries lacks in.

+. >ow reinvestent rate: It has been seen that investors areleast likely to reinvest in %frica because of their uncertaineconoy and political reality.

. #reen3eld vs brown3eld FDI: % big proportion of FDI in %fricaare privati*ed 3rs or brown3eld FDI. %s this type ofinvestent involves taking over the state owned enterpriseswith less investent and thus FDI in-ow is lesser into the hostcountry. n other hand7 green3eld FDI is investent fro the

ground level of establishing industry to its copletion.

Deterinants of FDI -ows:

1. #D) growth rate: It has been found that #D) growth is directlyproportional to FDI investent.

!. In-ation rate: In-ation increases the user cost of capital thusa&ecting FDI in negative way. It re-ects poor econoiccondition of the country thus discouraging FDI to invest.

(. /eal interest rate: % low real interest rate suggests politicalinstability and thus discourages FDI to invest.


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+. penness of the econoy: the ease with which the investorcan ove oney in and out of the country also deterinesthe -ow of FDI.

. International reserves: Foreign investors see largeinternational reserve a stable local econoy thus wants to

invest in that particular region.5. "xternal debt: debt shows the negative aspect of the countries

econoy7 which discourages FDI.6. Taxes: The nature of countryBs taxation law shows its ability to

attracts or retains foreign investor. % unlikely taxation law willdiscourage foreign investent.

8. )olitical rights: Deocratic and politically stable countriesattract ore FDI as they respect the rule of law and propertyrights.

;. Infrastructure: Foreign investors prefer econoy with a welldeveloped infrastructure like roads7 counications7 etc. asproduction cost is lesser in countries with well developedinfrastructure.

1ow per capita incoe and saller arket: >ow per capitaincoe shows the less purchasing power of the people7 thusFDI are less likely to invest in these countries as they will havevery sall arket si*e to sell their goods.


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WTO

- General Agreement on trade & tariff (GATT): The General Agreement

on Tariffs and Trade (GATT) was a multilateral agreement regulating

international trade. According to its preamble, its purpose was the

"substantial reduction of tariffs and other trade barriers and the elimination

of preferences, on a reciprocal and mutually advantageous basis." The WTO

was born out of the General Agreement on Tariffs and Trade (GATT),

which was established in 1947. A series of trade negotiations, GATT rounds

began at the end of World War II and were aimed at reducing tariffs for the

facilitation of global trade on goods.

- Most Favoured Nation Rule (MFN) : A country grants this clause to

another nation if it is interested in increasing trade with that country.

Countries achieving most favored nation status are given specific trade

advantages such as reduced tariffs on imported goods. Under the WTO

agreements, countries cannot normally discriminate between their trading

partners. Grant someone a special favour (such as a lower customs duty rate

for one of their products) and you have to do the same for all other WTO

members.


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- Uruguay round of trade negotiations (1986-1994) : The Uruguay Round

was the 8th round of multilateral trade negotiations (MTN) conducted

within the framework of the General Agreement on Tariffs and Trade

(GATT), spanning from 1986 to 1994 and embracing 123 countries as

"contracting parties". The Round led to the creation of the World TradeOrganization, with GATT remaining as an integral part of the WTO

agreements. The broad mandate of the Round had been to extend GATT

trade rules to areas previously exempted as too difficult to liberalize

(agriculture, textiles) and increasingly important new areas previously not

included (trade in services, intellectual property, investment policy trade

distortions). The Round came into effect in 1995 with deadlines ending in

2000 (2004 in the case of developing country contracting parties) under the

administrative direction of the newly created World Trade Organization

(WTO).

• The main objectives of the Uruguay Round were:

• to reduce agricultural subsidies

• to lift restrictions on foreign investment, and

• to begin the process of opening trade in services like banking and

insurance.

• They also wanted to draft a code to deal with copyright violation and

other forms of intellectual property rights.

- 161 countries in WTO

Exceptions of MFN:-

1. Member countries are allowed to grant trade concessions to developing

countries.

2. Trading blocks for regional integration blocks

3. EU : The European Union reserves the right to adopt or maintain any

measure that accords differential treatment to countries deriving from a

specific provision found in economic integration agreements to which the

European Union is a Party and according to which the European Union may

amend any measure only to the extent that the amendment does not decrease

the conformity of the measure, as it existed immediately before the


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amendment, with obligations on market access, national treatment and most-

favoured-nation in these economic integration agreements.

4. NAFTA : NAFTA exempts from the MFN obligation and advantage

accorded under a tax agreement.

The NAFTA provisions do not apply to any taxation measures in existence

at the time that NAFTA came into effect (1 January 1994).

The NAFTA provisions do not apply to the renewal or any amendment of a

tax measure that does not decrease its conformity.

The NAFTA, provides an exception for "any new taxation measure aimed at

ensuring the equitable and effective imposition or collection of taxes and

that does not arbitrarily discriminate between persons, goods or services ofthe Parties or arbitrarily nullify or impair benefits accorded under those

Articles."

5. Rule of Origin - African Growth & Opportunity Act (AGOA 2000) :

(1) preferential tariff treatment in accordance with the GSP;

(2) multilateral non-tariff preferences negotiated under GATT auspices;

(3) multilateral arrangements among less developed countries; and

(4) special treatment of the least developed countries in preference

programs.

Benefits of MFN:-

1. Increases trade creation and decreases trade diversion.

2. Allows smaller countries to enjoy benefits reserved for large countries.

3. Simplifies tariffs & trade produces.

4. MFN prevents domestic interest against protectionist tendencies.

MFN status is critically important for smaller and developing countries for

several reasons. It gives them access to the larger market. It lowers the cost

of their exports since trade barriers are the lowest given. That makes their

products more competitive.


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The country's industries have a chance to improve their products as they

service this large market.

Their companies will grow to meet increased demand. They receive the

benefits of economies of scale. That, in turn, increases their exports andtheir country's economic growth.

It also cuts down on red tape. Different tariffs and customs don't have to be

calculated for each import since they are all the same.

Best of all, it reduces the ill effects of trade protectionism. Even though

domestic industries may not like to lose their protected status, they will

become healthier and more competitive as a result.

WTO & Global Business:-

1. Cuts the cost of doing business internationally.

2. Simplifying tariffs.

3. Lower tariffs.

4. Non-discrimination

5. Minimum standards for goods.

6. Cut living costs & raise living standards.

The 10 benefits

1. The system helps promote peace

2. Disputes are handled constructively

3. Rules make life easier for all

4. Freer trade cuts the costs of living

5. It provides more choice of products and qualities

6. Trade raises incomes

7. Trade stimulates economic growth

8. The basic principles make life more efficient


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9. Governments are shielded from lobbying

10. The system encourages good government

Agreement on trade-Related Aspects of Intellectual Property Rights

(TRIPS):-

- Private rights

- Copyrights & related rights

- Trade marks

- Industrial designs

- Patents

- Layouts designs


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Documents

FDI Over Foreign Aid and External BorrowingF