What Hinders FDI from Growing Further

Whether Foreign Direct Investment (FDI) has a positive role in economic growth is a subject of controversy. While the classical concepts and the conventional assumption seem to suggest that FDI has an overwhelmingly positive contribution to economic development, on the contrary, the dependency theory sees FDI as a channel through which the centre – advanced countries – exploits the periphery-developing countries.

Despite these polarised arguments, practices show that it is possible to take a middle path that recognises the international market and state mechanisms. Such a pragmatic approach mixes sector-focus intervention and openness in dealing with foreign direct investment. Inviting FDI inflow and its purpose of a long-term goal of development may also differ from country to country. The Ethiopian way, at least at a policy level, seems to indicate this position.

Realising the importance of FDI in the economy, the Ethiopian government has been implementing reform programs and trade liberalisation. Indeed, it has also been able to attract a significant volume of foreign investment worth about four billion dollars last year. The government tried to attract investments by providing different incentive mechanisms. In addition to the availability of cheap labour, a less costly utility such as electricity and land lease, and a big local market, foreign investors have been attracted to Ethiopia by tax exemptions, duty-free imports of capital goods, and the up to 70pc local financial source for capital investment upon their ability to mobilise 30pc.

Indeed, the country is increasingly becoming one among the FDI destinations in Africa, and the number of investment projects is also increasing according to government reports, albeit, with a decreasing growth rate since recent times. Despite the increase in volume, the contribution of FDI to GDP still counts low compared to other countries that have a similar potential of FDI attractions. It focuses on some sector value chains, with registered failure in some others.

The contribution of FDI to the economy and amount of its inflow could have been high if not for some structural and orientation problems, and ideological stands. While there is high demand for foreign investments, and there exists state-driven promotion to attract them, the return is not remarkable due to another unfavourable investment ecosystem.

First and foremost, the less efficient and un-integrated service delivery system closes investment appetites. Even though government agencies claim that there is a one-window service, still foreign investors have to go to several public offices to get services, and the challenge continues. The less integrated availability of infrastructures and less coordinated work between regional states and the Federal government leaves many investors stranded. The lack of clear procedures (maybe due to frequent reforms) and lack of sufficient availability of information force investors to approach public offices through fixers or dealers, which finally exposes them to corruption-based relationships.

The most valuable assets in attracting foreign investment, political and macroeconomic stability, also looks to be volatile, and if not, does not get trust from the financially strong foreign investors, unfortunately. The recent political unrest has already given us a lesson that the polarised culture of politics in this country could explode anytime. And it would be naïve to assume that the big multinational corporations will not understand or predict such likely scenarios. The frequent fluctuation in exchange rates, the shortage of foreign currency and inflation problems of the macroeconomic system may not give comfort and security to foreign investors.

More challenging is also the way the Ethiopian financial system works. It becomes over-regulated for them and much less connected to the global financial circle. It does not also come up with creative alternative arrangements that could ease works of foreign and local investments alike for that matter.

Needless to say, FDI involves high risks and demands security and legal protection. Swift and fair judicial service can give confidence to an investor to come in. The lack of business-related legal professionals and the intolerably sluggish litigation process in the courts also set an image and discourage the inflow of FDI.

Aggressive promotion, good economic growth, availability of cheap human labour and utility and state-driven financial incentives alone cannot be a pass for attracting financially and technologically strong FDI. Had it been for that only, the country could have gained greater contribution from the inflow. That is why, despite high inflow of FDI in number, the influence of it on the overall economy has been minimal. Especially, the availability of a 70pc local loan for capital investment has been attracting locally independent FDI, and that targets local markets due to the high-profit margin and inferior quality for export. In fact, the poor screening process of investors and lack of adequate supervision are also among the major problems contributing to the meagre share of FDI in the economy and lack of foreign currency as per the plan.

Recognising the failure of the expected contribution from FDI, the government has made a major policy shift in the ratio of financial incentive mechanisms. The bar for expected financial capacity of foreign investors for capital investment is raised to 50pc since December 2016 and they can seek a loan for the other half from the state development bank. This is done with the intention that it would bring financially and technologically a strong inflow of FDI, with better professional skills and knowledge. Though it is a right decision, it would definitely decrease the inflow of investment, unless the structural bottlenecks and policy based problems mentioned above, especially, are resolved to compensate the likely gaps to be created.

The inflow of FDI to Ethiopia would greatly catalyse the economic growth of the country by creating jobs, enhancing labour skills, transferring technology, and filling the gap between desired investments and domestic savings. And above all, there is a sense of urgency to increase tax revenue, foreign currency reserve, and improvement of industrial organisational management.

Even if it is known for a fact that the government of Ethiopia foresees that the primary investment and industrial development of the country has to have a domestic root, FDI is a fundamental transition to it. For the members of the ruling party who seek policy independence and economic freedom, though FDI is much needed right now, it is not an ultimate goal to be pursued. For them, it is mainly important to build up capacity. While this is the state policy and the conviction among prominent members of EPRDF, there is also internal struggle from another group of the same party for more open and long-term pursuance of FDI. Regardless of the current policy orientation, as much as there is a strong need for FDI they are yet to realise that can only happen when the quality, efficiency and integration of services increases, the fluctuations in the macroeconomy are balanced, and security and political stability are sustained. Moreover, the work of screening and supervising investors needs the utmost care! The miserable failures the country has seen with opportunistic foreign investors have to end.

Published on May 28,2017 [ Vol 18 ,No 892]



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