27 Sep. - 3 Oct. 2001
Issue No.553
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Al-Ahram Weekly Online 27 Sep. - 3 Oct. 2001 Issue No.553 |
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Making the world go round
Although foreign investment is pouring into an increasing number of countries, creating a more business-friendly environment remains a challenge for many, reports Sherine Bahaa
A report published by the United Nations Conference on Trade and Development (UNCTAD) reveals that foreign direct investment (FDI) is reaching many more countries than it did in the past. According to the "World Investment Report in 2001," FDI increased by 18 per cent compared to the previous year to reach a record $1.3 trillion during 2000.
Tracking the growth of FDI from the mid-eighties through the late nineties, the report notes that number of countries receiving FDI increased from 17 (of which six were developing countries) to 51 (of which 11 were developing countries).
The report attributed much of the increase in FDI to cross-border mergers and acquisitions (M&A), which accounted for $1.1 trillion of FDI in 2000.
Managing Director of the Economic Research Forum Heba Handoussa suggested that the increase in FDI was merely a feature of globalisation. For Handoussa "mergers and acquisitions do not represent an increase in investment, but [only] a change in the nationality of the company and an increase in the size of some companies at the expense of others in the same field." As the report explains, there has been a conspicuous trend towards the development of conglomerates from among large and transnational corporations.
According to the report, the Middle East and North Africa in 2000 received a total of $6 billion of investment -- a paltry sum compared to the $240 billion that went to developing countries during the same period.
Handoussa pointed out that FDI during the period under discussion went primarily to a limited number of countries that have a history of attracting investment.
In terms of total inflows and outflows of investment, the United States, Europe and Japan accounted for 80 per cent of these. However, the US last year ceased to be the world's biggest foreign investor, having been overtaken by the United Kingdom and France. "This change should be taken into consideration by developing countries like Egypt who should start wooing the European countries, not only the Americans, to bring investment to our country," said Handoussa.
Apart from M&A's, the UNCTAD report mentioned privatisation as having a salient impact on FDI. Although the report offered limited data on the impact of the progress of privatisation programmes in attracting FDI, Handoussa asserted that in countries with large public sectors, progress towards privatisation has been pivotal to drawing FDI. And, she cautioned, that the increase in FDI from $1 billion to $1.235 billion in Egypt during the last year was potentially "only temporary and vulnerable to changes in the privatisation programme."
Handoussa asserted the importance of differentiating among types of FDI, suggesting that discussion of inflows of "brown field" investment is more meaningful than total FDI. Characterising this type of FDI as "real investment," she defined it as the introduction of new companies in new fields, providing new job opportunities.
UNCTAD's report distinguishes between two types of brown field investment. The first is investment that is attracted to the host country because of low labour costs and the second is investment that is attracted because of high tariff barriers.
The report placed Egypt within the second category suggesting that avoiding tariffs has been more decisive than cheap labour costs to decisions by foreign companies to enter the Egyptian market.
Moreover, this year's report dealt at length with backward linkages. These are defined as the provision by of components and services by domestic suppliers to foreign investors. The presence of such local providers are a logistical and cost boon to investors and are thus a key factor in attracting FDI.
UNCTAD's report asserted that if countries wish to obtain FDI, they must go beyond merely adopting market-friendly policies -- the so-called first generation of policies to attract investment. The "second generation" of such policies involves marketing investment opportunities abroad, which requires establishing national investment promotion agencies. The "third generation" of policies targets foreign investors at the industry and firm levels, taking into account national plans for regional development.
Handoussa concluded saying that Egypt has not gone beyond the first generation of policies. "Though we established a specialised organisation for investment, it is only setting rules and regulations to encourage FDI. It does not have a strategy to market Egypt as a location for investment."
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