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Business Law Brief | Spring 2009

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enerating significant investment returns will solve the world’s biggest needs. Specifically, a nexus exists betweenthe growth of frontier markets in Africa and the world’smost confounding challenges. The majority of foreign directinvestment (FDI), whether deployed by multinationals, venturecapitalists, private equity, or other investment vehicles, will bediverted from least-developed economies because of risks, bothreal and imagined. FDI in low-carbon, clean-energy infrastructure can promote sustainable develop-ment while achieving high rates of return forinvestors.Tax policies, can stimulate invest-ments for sustainable livelihoods; for-eign companies might select whereto establish a presence based ontax incentives. A targeted approachthat draws FDI into low-carbonemitting technologies offers prom-ise for a new energy future for thedeveloping world and a healthierglobal environment for the planet.Many African nations are revis-ing their corporate tax policies to try toattract FDI into clean-energy and relatedsectors. This brief will highlight a regional,global, ecological, and social problem and providepolitical and financial recommendations.

Broadening the Lens

As mainstream emerging markets move to become high-income economies, it makes sense to look at countries that arestill in an embryonic stage of development.

The Standard &Poor’s Frontier Markets index returned an annualized 37 percentreturn over the past five years and provide a low-correlation withreturns of emerging and developing economies.

Investors andhost governments need a radical paradigm shift to capture these

Sustainable Growth:

everagIng

olICy

frICa

By Josh Tetrick

†

opportunities. Domestic political leaders should establish boldincentive policies to attract FDI. Investors should cultivate aninvestment approach that embraces the nexus between the needand the market.The investment community and political leaders must movepast the limits of either vibrant growth or sustainable develop-ment. A mindset that considers a broader array of elements, whileembracing the tension between opposing ideas to createnew alternatives that take advantage of many possible solutions, forms the backbone of this investment and policy overview. Thetransition to a low-carbon economy, water scarcity, resource degradation,and related sustainability issues willincreasingly provide much of theshape and direction of the social,economic, and political landscape.The path of least resistance, bothin terms of technological feasibility,cost, and expertise, is the continueduse of coal resources, the destructionof forested areas, and the production of energy from other high carbon-emittinggeneration facilities. Unless a low-carbonenergy infrastructure is put in place today, highcarbon-emitting energy sources will continue to accountfor around 80 percent of energy consumed in 2030.

Africa: A Comparative Analysis

The world’s poorest countries, especially those in sub-Saharan Africa, have attracted little FDI. In 2004, sub-Saharan African nations attracted only $13 billion, mostly in the extrac-tive and commodity sectors.

Examining the numbers afterremoving the oil-producing countries (Chad, Nigeria, Congo,Sudan, Angola, Equatorial Guinea, and Gabon), FDI for all of Africa totaled only $4 billion.

This meager $4 billion represents

“Let us choose to unite the power of markets with the authority of universal ideas.”Kofi Annan

Business Law Brief | Spring 2009

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less than 1 percent of the world’s FDI, despite the fact that Africacontains over 10 percent of the world’s population.

Frontier markets in Africa are undermined by a dearth of liquidity, volatility and political instability, abject poverty, hyper-inflations, crime, poor regulation, and endemic corruption.These qualities create both subjective negative perceptions andobjective financial risks. As a result, instead of the world’s poorestcountries receivingthe bulk of FDI, themiddle-income coun-tries attract the mostFDI. For example,in 2004, Brazil’s FDItotaled more than $18billion—almost dou-ble that of the entirecontinent of Africa.

A basic foundation-—political stability,guarantees againstexpropriation, andreasonably stablecurrency—must bein place before thevast majority of for-eign investors will consider investing in developing countries(extractive sectors are the exception). FDI does enter some con-flict zones—notably, in the diamond and oil industries—but itmainly goes into more stable areas. Investors also look to reliablepower, electricity, and access to clean water, health care facilities,roads, communications, and airports.

Finally, potential foreigninvestors will look to ease of entry through ports and to clear andstable tax laws.

FDI and Africa: Historical Skepticism

Opportunities in clean energy investment are immense,but Africa, the continent with the largest number of frontiermarkets, has a history of cynicism towards foreign investmentand linkages with the global economy. The continent’s colonialpast has significantly and understandably affected its view of foreign entities. Outsiders may still be equated with exploita-tion in the minds of citizens. A number of international econo-mists and notable non-governmental organizations (NGOs)also express criticism of FDI. One such criticism is that inter-national firms—such as Firestone in Liberia—with their vastresources, encroach on and eventually squeeze out local firmsthat have no real chance of competing.

A number of domesticrubber plantations in Liberia have been unable to compete with the breadth of Firestone’s financial and physical resources.International firms are often charged by NGOs with exploitinglocal labor, or not tapping into local labor and local suppliers.

These criticisms apply in the Liberian context, as FirestoneLiberia has routinely been sanctioned by local and internationalenvironmental NGOs for local water contamination and illegaldeforestation. Finally, critics of FDI’s role in promoting develop-ment note the potentially destabilizing effect on domestic cur-rencies when outflows occur and emphasize that multinationalcompanies exist to make a profit, a motive that often divergesfrom the develop-mental needs of the host country.

Reluctance to acceptFDI has led some African countries toconstruct domes-tic barriers to for-eign capital.

Thesebarriers include:national interven-tions, such as theexpropriation of foreign investment; Africanization, in which ownership isseized by local gov-ernment from for-eign owners; explicit preference and special treatment of domestic investors; and legal obstacles, such as the reservationof certain sectors for domestic enterprises (e.g., Liberia invest-ment law currently reserves 26 sectors for domestic firms), therestriction of foreign ownership, and the imposition of localemployment requirements on foreign firms.

Countries may also have indirect barriers to FDI, including: bureaucraticobstacles, delays in customs or visa approval, unclear regulatory standards, a corrupt legal system, or unstable infrastructure.

While problems with infrastructure and the legal system are notintentional, bureaucratic obstacles may be the state’s attempt toimpede foreign operation.

However, not all African countries are resistant to foreigninvestment; in fact, Uganda, Tanzania, Angola, Ghana, andKenya have all seen significant increases in FDI due to activepromotion and FDI facilitation.

A World Bank study revealedthat, despite the difficult environments in which foreign enter-

Policy and investment experts estimate$100 billion must flow into developingeconomies by 2030 to meet the challengesof sustainable development.

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prises operate (i.e., environments high in macroeconomic insta-bility, corruption, crime, and/or technological unreliability),foreign firms are more productive and make a greater contribu-tion to local development than domestic firms.

The WorldBank study also showed that foreign firms employ more work-ers than local firms, report more revenue to the governmentfor tax purposes, invest more into local infrastructure, are morelikely to have formal training programs for their employees,and are more likely to provide medical care or medical insur-ance to their workers than local firms.

The recent researchindicates that FDI increases productivity through investmentsinto both physical capital (e.g., infrastructure, internet connec-tivity, technology resources, roads, bridges) and human capital(e.g., education, training).

It leads to increased employment,the transfer of new technologies, and the infusion of new andinnovative management and leadership practices.

These study results undermine a number of the common criticisms of FDIand directly disprove others.Since the 1970s, when FDI inflows totaled less than $1billion per year, FDI in Africa has increased to $9 billion peryear in 2000.

However, Africa’s share of both the total worldand developing-country FDI has decreased since the 1970sand FDI remains concentrated in a few select countries.

In the past ten years, Nigeria, South Africa, and Angola were the recipients of 55 percent of Africa’stotal FDI.

Overthe same period, thetwenty-four Africancountries that werethe lowest recipientsaccounted for lessthan 5 percent of thecontinent’s FDI.

Recent World Bank and UNCTAD (UnitedNations Conferenceon Trade and Devel-opment) findingsindicate that FDIbuilds a foundationfor solid economicgrowth.

Importantly, it has the potential to vastly increasethe export productivity of local enterprises through linkages with international firms.

Economic models produced by William Davidson Fellows at the University of Michigan indi-cate that a 1 percent increase in countries export growth leadsto 15 percent increases in economic growth.

Experiences inEast Asia and India, where hundreds of millions people havebeen lifted from poverty during the last three decades, bearthese theories out.

International Policy Framework for Clean-Energy Investment

A lack of energy infrastructure (also known as energy pov-erty) is a primary impediment to development efforts in educa-tion, health, and governance and subverts the attraction of globalFDI in developing economies. Indeed, more than 2.4 billionpeople worldwide lack daily modern energy services, and 1.6billion people lack electricity in their homes.

50 percent of the world’s global energy demand will come from these fast-growingeconomies by 2030.

Policy and investment experts estimate$100 billion must flow into developing economies by 2030to meet the challenges of sustainable development.

NicholasStern, a prominent UK economist, and other developmentexperts cite even larger investment and trade flows for adapta-tion capacity while avoiding the most serious consequences of climate change.

Therole of investment infacilitating sustainabledevelopment and alle-viating global poverty is recognized in the8th United Nations’Millennium Develop-ment Goal, which callsfor a partnership thatfully integrates theleast-developed coun-tries into the globaleconomy through FDIand trade.

The UN’s World Economic Sit-uation and Prospectsreported that Africaexperienced investment growth of 5.1 percent in 2007.

If Africa is to reach the 7 percent growth target set by the UnitedNations Development Program to halve the number of peoplein poverty by 2015 while transitioning to a clean-energy infra-structure, the countries in the region must aggressively increaseinvestment and participation in the global economy.International cap-and-trade regimes, renewable fuel/energy portfolio standards, energy efficiency regulations, and related

In the U.S., state initiatives and pendingfederal legislation before the Senate includeprovisions that would welcome overseascredit and promote the linkage of state,national, and global trading mechanisms.