FDI as a factor of economic development in LDCs

1. FDI as a factor of economic development in LDCs Ing. Tomáš Dudáš, PhD.

2. Least developed countries – basic criteria • low-income (three-year average GNI per capita of less than US $905, which must exceed $1,086 to leave the list) • human resource weakness (based on indicators of nutrition, health, education and adult literacy) • economic vulnerability (based on instability of agricultural production, instability of exports of goods and services, economic importance of non-traditional activities, merchandise export concentration, handicap of economic smallness, and the percentage of population displaced by natural disasters)

3. Current list of LDCs

4. Financing economic development • Least developed countries often suffer a severe lack of domestic capital • Vicious circle of poverty • Possible means of external financing • Official development aid • Foreign loans • Portfolio investment • Foreign Direct Investment

5. ODA – questionable effectiveness

6. Potential positive effects of FDI inflows into developing countries • New workplaces • Growth of labor productivity • Export growth • Inflow of new technologies • Inflow of management know-how • Ultimately – GDP growth and growth of standards of living

7. Empirical evidence • Blomstrom, Lipsey, and Zejan (1992) • Found that FDI has a strong effect on economic growth in Least Developed Countries (LDCs). • Borenzstein, de Gregorio & Lee (1998) – tested effect of FDI on growth for 69 developing countries • For countries having a low initial stock of human capital (as is the case in many African countries): • “FDI is an important vehicle for the transfer of technology, contributing relatively more to growth than domestic investment.” • FDI found to be 3 times more efficient than domestic investment in spurring growth

10. FDI and Least Developed Countries (LDC) • These countries are overlooked by potential investors • Sub-Saharan Africa– most problematic region • If we remove FDI into extractive industries in this region then the yearly inflow will amount to – 4-5 bln. USD • For comparison – 10 % of the global population lives here • These countries are long time clients of the World Bank and the IMF – despite this fact they have only a limited success in attracting FDI

15. Basic provisions needed for attracting foreign investors • Political stability • Exception – fossile fuels and other minerals • Basic public services • Security, basic health care services, basic government services • Basic infrastructure • Voda, elektrika, prístup k letiskualebo k prístavom, základnételekomunikačnéslužby • Water, electricity, roads, airports and harbors, basic telecom services

17. Most interesting sectors for FDI in the least developed countries(Jeffrey Sachs) • Traditional extractive industries • Industry based on local raw materials • Ex. textile industry based on local cotton production • Tourism • Labor intensive industries • Lesss demanding IT services • Call centres, low level business services…

18. First step to success– gaining first investor • In the case of LDCs the first successful FDI project is crucial – sends a positive signal to other potential investors • The first investor may get extra advantages and subsidies • Tax subsidies, cheap land, tariff exemptions, industrial parks, special economic zones, other financial subsidies • IMF and the World Bank did not encourage investment incentives for foreign investors in Africa – but nowadays their position is changing

19. How could donor countries help • Help in the field of investment promotion • Helping to build the basic infrastructure • Greatest help – opening of the markets to products coming from least developed countries

20. Case study – Africa and China

21. China in Africa: 3 dimensions • Foreign direct investment • Aid • Trade

22. FDI outflows from China

23. China FDI flows to developing world

24. China’s FDI outflows to Africa

25. Comparison of FDI in Africa

26. Africa is one of the richest continents in the world …