Musings on attracting and vetting foreign direct investment

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Vestiges of protectionism have become magnified in the aftermath of the GFC as countries show renewed interest to safeguard local assets, protect domestic industries and improve balances of trade.

Eldrede T. Kahiya

Of particular interest to me in this piece is the issue of foreign direct investment (FDI) which usually takes two forms; ‘start from scratch’ greenfield investments and acquisition based investments. A common misconception in this discourse is the notion that free market economies are open to all types and forms of FDI.

Policymakers from industrialised economies, just like their counterparts from developing markets have vested interests in who buys what, or who sets up shop where, in their countries.

Depending on the economic, social and political impact of an investment, Western governments and policymakers often stand in the way of FDI arrangements they don’t consider to be conceivably fruitful.

Over the past few years, I have followed closely, two high profile examples; inward investment in USA ports by an Arabian conglomerate, and investment into (or acquisition of) New Zealand dairy farms by a Chinese consortium.

There was a major public outcry in the USA in 2006, when Dubai Ports World, an Emirati marine terminal operator, won a bid to buy P&O, giving it the right to operate six US ports located mainly on the eastern seaboard. So thunderous was the opposition to this transaction that President George Bush II, who had supported the deal, decided to not invoke his veto power thereby preempting a feisty confrontation with Congress.

Over the past few years, New Zealand has seen its fair share of spirited debate concerning the acquisition of CraFar Farms by a Chinese investor. Some of this deliberation has revolved around the proprietary rights of indigenous Maori groups, over the surrounding land, and also the economic and welfare impact of the acquisition, on multiple stakeholders.

Pertaining to Dubai Ports World, the major bone of contention was the purported ramification for national security, especially in the light of terrorism.

Does this mean that the USA is unequivocally opposed to all investments regarding its ports? The answer is no. The state of Florida recently approved an investment into one of its ports, by yet another Persian firm. The ‘lease’ agreement made too much economic sense to ignore, including cutting costs, improving efficiency and creating synergies.

The aforementioned case involving CraFar farms came to a conclusion via the court system. This gave ample opportunities for all parties to claim their stake and be heard in public forum. In giving the greenlight to the deal, two years ago, the New Zealand government insisted on a 50/50 ownership between Shanghai Pengxin, the Chinese investor, and Landcorp, a state run enterprise. Additionally, Shanghai Pengxin was expected to inject NZD15.7 million worth of fresh capital to help upgrade, mechanise and automate these farms.

I bring these two cases to the forefront because they could well be relevant in shaping how Zimbabwe approaches FDI. I’m mindful of the differences in the underlying economic structures and institutional environments of these countries compared to Zimbabwe.

However, the logic and criteria underpinning the vetting process for FDI ought to be similar for all countries that seek to grow their economies while advancing prosperity for the majority of the population.

Zimbabwe’s general policy or predisposition towards FDI is something of an enigma. On one hand there is an apparent recognition that the economy is in dire need of an FDI injection in the region of US$10 billion, but on the other hand the logic and criteria associated with courting and evaluating potential FDI deals remain quite foggy.

As a matter of fact, what is unmistakable is Zimbabwe’s obdurate commitment towards economic indigenisation. A week ago, newly appointed Minister Chris Mushohwe, made this abundantly clear in sentiments covered by the press. Here are some snippets or sound bites I cannot ignore.

‘In fact they (foreigners) are very lucky that they get 49%. In fact, 49 % is the maximum and 51% is the minimum. So it’s not cast in concrete that it’s 49%, it can be one percent because it’s the maximum and 51 % can be 99 % because it’s the minimum’.

I’m hoping I’m wrong, but my interpretation of this is that foreign investors need Zimbabwe more than Zimbabwe needs them and foreign investors have to be prepared for the day Zimbabwe may raise the ownership stakes from 51 to 99%!

The first remark is an outrageous hyperbole. Look no further than the recent trends in investment in the world in general, and in Africa in particular, and you will realiase immediately that Zimbabwe is a fringe player.

The 2013 and 2014 World Investment Reports, published by the United Nations, illustrate that a number of economies in South East Asia offer a much better investment climate and competitive return on investment than Zimbabwe.

On the African continent, Zimbabwe is progressively becoming an after-thought. Of the $281 billion worth of greenfield FDI investments to Africa (2009-2013), Zimbabwe’s share was about 1%. The bitter irony is that most of these FDI deals (e.g. $4 billion investment into geothermal electricity in Ethiopia, by Reykjavik Geothermal or the $7 billion greenfield investment into Mozambique’s rail network and ports) are in the energy and infrastructure sectors where Zimbabwe’s need is self-evident.

This comes against the backdrop of a report published in the Economist in 2011 suggesting that, lion kings (comprising Angola, Chad, Congo, Ethiopia, Ghana, Mozambique, Nigeria, Tanzania and Zambia) are the next big thing for a foreign investor seeking first-mover advantages by investing into Africa.

The point is, even within the Sub-Saharan region, Zimbabwe is no longer the crème de la crème, and has not been for about a decade now. Henceforth foreign investors do not need to prepare for the scenario where the local ownership threshold changes; Zimbabwe has to brace itself for running an economy bereft of FDI inflows.

Indeed, the rhetoric from Minister Mushohwe works wonders for purposes of bullying and blackmailing foreign firms already operating in Zimbabwe.

It is also equally effective at preventing would-be foreign investors from opening their wallets. Another puzzling remark by the Minister went: “This tendency of threatening each other saying foreign direct investment won’t be available is not true. We are a sovereign State. We welcome FDI, we welcome foreigners to come into our country to invest on our terms.”

Again pardon my confusion here, but it sounds like, it’s the Zimbabwean government making the so-called threats and not the prospective foreign investors. Another comment I struggled to come to terms with was; “Whoever doubts that claiming that they are Zimbabwean, I want to see them. It has to be on our term.”

Please help me decode this one. Writing this open-ended opinion piece to revitalise discussion on how to adjust investment-related policies so they fit the national economic agenda and the parameters of a dynamic and ultra-competitive global marketplace makes me an unpatriotic Zimbabwean? For the good of ordinary hardworking Zimbabweans, the time for this combative and polarising attitude is past.

Zimbabwe requires a vibrant and crystal clear investment framework in which the ownership requirements associated with indigenisation are just one element of the criteria. The impact of a particular FDI transaction should be appraised against a robust triple bottom line that places equal emphasis on economic, social and environmental outcomes. In this context, indigenisation is but one aspect of the economic (or social) dimension of the equation.

Zimbabwe can ill-afford to assess an investment transaction exclusively on the willingness of potential investors to surrender half of the ownership to Zimbabweans. Thus, the issue of FDI can no longer revolve around indigenisation alone. In this instance, I’m encouraged by Vice President Mnangagwa’s words, calling for a fresh insights vis-à-vis how indigenisation fits into the FDI narrative.

The everyday truths dictate that Zimbabwe courts FDI that injects much-needed capital into the economy, creates jobs and develops infrastructure. Zimbabwe also requires FDI which spawns downstream benefits (or spillover effects) through general improvements in productivity, efficiency, skills development and technology transfer across relevant sectors.

I have gone on record for saying that I’m not opposed to the idea of holding foreign investors accountable to specific standards and requirements. In some countries specific levers, such as rules pertaining to repatriation versus reinvestment of earnings, are used instead of ownership requirements.

Other countries place a premium on social and environmental aspects ensuring FDI does not culminate in unnecessary displacement of citizens or disruptions to their livelihoods. It is also not uncommon for countries to mandate foreign investors to adopt and stick to best practices concerning sustainability and environmental management. Additionally, each investment deal is assessed individually and evaluated on its own merits. There is some anecdotal evidence of this sort of clear-minded and pragmatic thinking in the examples involving inward FDI into the USA and New Zealand described above.

Zimbabwe continues its unproductive attempt to entice additional foreign direct investment against the backdrop of a slowing economy, epitomised by deflation, low aggregate demand, unemployment, and ongoing viability problems which have led to an increase in company closures and redundancies.

FDI alone is not a panacea for all ills afflicting the Zimbabwean economy. However, it is an obligatory part of the prescription required to get the economy to good health. Current estimates of Zimbabwe’s inward FDI for 2014 have come in just under half a billion dollars which equates to roughly 20% of what Zambia is attracting annually.

Thus there is an urgent need to reconcile the indigenisation policy with the FDI imperative. It’s time to take stock of what indigenisation has achieved for every Zimbabwean and weigh this against the tangible benefits additional FDI may create for the economy. For once, I agree with Minister Mushohwe that indigenisation may have benefited just 1000 Zimbabweans and that the nation deserves to know who these individuals are. I also go further to argue that the nation deserves an FDI policy framework that creates verifiable benefits for 14 million citizens.

Eldrede T. Kahiya is a New Zealand-based academic who holds a PhD in Marketing and International Business. He can be reached by email via EldredeK@aol.com

2 thoughts on “Musings on attracting and vetting foreign direct investment”

  1. Babra Amos says:

    i wonder where they get some of these ministers who shoot themselves in the foot. Zimbabwe desperately needs fdi yet says all this rubbish against the same money they need

  2. kwv says:

    This is the problem when one has idiots and gangstas running the show. Of course we need investment and of course it should be looked at carefully to make sure it is beneficial to the nation as a whole. The problem is that corruption is so ingrained that backhanders and not common sense determine policy.

    And it is not only foreign investors who are put off, Zimbabwe has probably the most business-unfriendly environment I know. Whenever a firm makes a profit, some gangsta decides to milk it. And heaven forbid if you are a dreaded Euro! Being a citizen counts for nothing at all.

    It is so demoralising to see our country being deliberately destroyed, to an extent where it cannot recover. Somalia, here we come!

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