Investment in Mauritius

Introduction Investment From a macroeconomic perspective, investment refers to the use of resources either to increase the stock of capital or to replace capital that has been depreciated. The two types of investment we will consider are: Investment in Physical capital Investment in physical capital, also known as Gross Domestic Fixed apital Formation !GDF F" refers to the purchase of machinery, e#uipment and buildin$s, both by the public and private sectors, whether from a domestic or forei$n source. %rivate firms usually invest in physical capital to increase the productive capacity of their businesses while entrepreneur invest to earn returns considerin$ the risks involved. &n the other hand, Government investment is expenditure on capital pro'ects !such as improvin$ economic infrastructure" incurred by the state out of public funds. (y makin$ such investments the $overnment may induce hi$her future private investment but at the same time crowd out investment by competin$ for limited resources and as a result cause the cost of finance to increase.

Foreign Direct Investment(FDI) FDI is a direct investment made by a forei$n firm into production or business in a country, either by overtakin$ a company in the tar$et country or by expandin$ operations of an existin$ company in that country. FDI flows in the world have $rown considerably over the past decade, and have become a ma'or source of financin$ in developin$ economies. FDI has the benefit of complementin$ domestic investment rather than competin$ with it.

Investment in Mauritius

Investment in )auritius )auritius is reco$ni*ed as bein$ an excellent hub for investment. The country+s adoption of international best business practices and sustainable development policies has been acknowled$ed by international a$encies such as the &r$ani*ation for ,conomic ooperation and Development !& ,D", the Financial -ction Task Force !F-FT" and the .orld (ank !(oard of Investment, /012". The island is fully open to forei$n capital, talents and ideas. It was ranked first on the )o Ibrahim Index of -frican Governance /01/ for six consecutive years. The .orld (ank+s /011 Doin$ (usiness report ranks )auritius first amon$ -frican economies !/0th worldwide, out of 132 economies in all" in terms of overall ease of doin$ business. The .orld ,conomic Forum+s /0104/011 Global investment, /012". )auritius promotes a fairly liberal investment climate and recent reforms have further enhanced the attractiveness of the investment re$ime by cuttin$ red tape and fast trackin$ applications for an investment permit. 6ome of the emer$in$ 6ectors attractin$ substantial investment from both local and forei$n investors are a$ro industries, financial services, healthcare and medical travel, hospitality and property development, renewable ener$y and development, Information technolo$y and business process outsourcin$, seafood and a#ua4culture and knowled$e based industries such as forei$n university campuses, distance learnin$ and vocational and technical trainin$ !(&I, /012". ompetitiveness 5eport also places )auritius second in -frica !'ointly with 6outh -frica" and 78th in the world in terms of competitiveness !(oard of

Investment in Mauritius

Determinants of investment in )auritius a) Interest rate 9i$her interest rates increase the cost of borrowin$ used to finance most types of investment expenditures. If the cost of borrowin$ or finance increases, investors are less likely to undertake the resultin$ expenditures on capital $oods. Thus, hi$her cost of capital reduces the level of investment.

b) Economic growth -ccordin$ to economic theory there is a two4way causal relationship between investment and economic $rowth. Fast economic $rowth $enerates more demand for FDI and offers opportunities for makin$ profits. Thus the hi$her the Gross Domestic %roduct !GD%" rate the hi$her will be the rate of investment. &n the other hand, FDI flows !in the country" may enhance $rowth throu$h positive direct and indirect effects on variables that affect $rowth.

c) Exchange rate ,xchan$e rate affects the return on investment and conse#uently the level of investment. hi$hly volatile exchan$e rate provides no certainty on the expected returns of investment and thus may deter investment. :ocal firms are affected when chan$in$ exchan$e rates substantially alter their material cost or their ability to sell their $oods in forei$n countries at competitive prices. )auritius depends considerably on external trade and investment and the level of interdependence has increased in the last decade !Tandrayern45a$hoobur /011, p.2;". Given that )auritius is an export4led economy, chan$es in the exchan$e rates of its ma'or tradin$ partners impact the external value of the rupee. ,xchan$e rate fluctuations is a ma'or concern for export enterprises as an appreciatin$ rupee has a si$nificant impact on the competitiveness of their products and hence on their profit mar$in.
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Investment in Mauritius
In the face of the euro4*one crisis, the euro had been depreciatin$ and the potential drop in demand from euro *one economies and the lon$ duration of the crisis threatened that serious conse#uences will follow for the economy. )ost of the exports4oriented enterprises in )auritius sell their $oods to euro4based markets while they pay for the bulk of their raw materials in an appreciatin$ <6 dollar. .ith exports bein$ euro4centric and imports predominantly in <6 dollar, many enterprises are faced with fallin$ revenues and risin$ costs in terms of rupees!=u$nauth, /010". Due to the uncertainty prevailin$ over investment returns, investor delays their investment pro'ects.

d) Savings Investment depends on the savin$s rate as well as forei$n capital for productive lon$ term investment. Due to $lobal financial crisis, there was a decline in the savin$s rate from /1./ in /00> and 1;.? in /003 to 12.; in /00?! Tandrayen /011, p.2>". Thou$h total investment increased to /7.8 percent in /00?, the hi$her investment was due to a substantial in'ection of public money to stimulate the economy. %rivate investment share in total investment fell by /.1 percent. The declinin$ trend in savin$s rate widened the resource $ap and led to an increased dependence on the inflow of forei$n capital for productive lon$ term investment!tandrayen /011,p.2>". e) Business expectation If firms are optimistic about future economic prospects and expect an improvement in the economy, then they are more likely to increase investment now, even if current income is unchan$ed or fallin$. &n the other hand, pessimistic expectations of a declinin$ economy are then likely to cause a reduction in investment. .hen businesses foresee a severe recession or a lon$ lastin$ slump, then they reduce their investment level. In )auritius, in terms of FDI inflows, $iven the uncertain economic climate due to the $lobal financial crisis, many enterprises had put back their investment plans. .hile some construction pro'ects in the private sector have been deferred@ there have been delays in the implementation of various public sector pro'ects.

Investment in Mauritius
onstruction companies have reacted to the crisis by cuttin$ costs, free*in$ wa$es, re4or$anisin$ work systems and delayin$ recruitments and investments !tandrayen /011, 2>". ) !ate o in lation Investors will invest when the real return on investment is expected to be $reater than the inflation rate, that is, when the real return on investment is not eroded by inflation. 6ince )auritius en'oys a stable inflation rate, it doesn+t create any uncertainty amon$ investors. 9ence, a stable inflation rate encoura$es investment.

g) "echnology Technolo$y refers to the knowled$e that the economy possesses about production techni#ues. 5apid technolo$ical pro$ress creates plenty of investment opportunity leadin$ to hi$h investment. For instance, the introduction of information technolo$y in )auritius has led to massive investment by firms in computer hardware and software and, in $eneral, in the I T sector.

h) Social and political stability 6ocial and political instability create uncertainty re$ardin$ future prospects and thus deter investment. )auritius en'oys a stable political atmosphere and civil unrest and political violence are uncommon which $ives it an advanta$e over other countries. In addition, the laws of )auritius protect forei$n investors a$ainst expropriation and other risks. .ith the liftin$ of all forms of exchan$e controls in 1??8, investors are $uaranteed free and unlimited repatriation of their capital upon cessation of business. The .orld (ank Doin$ (usiness 6urvey /010 ranked )auritius 1/th in protectin$ investors, ahead of many industriali*ed countries. i) Sources o inance )auritius has been ranked 72 on the ,ase of $ettin$ credit in /012!.orld (ank, Doin$ (usiness, /012". This has been found to result mainly from the fact that small business face severe
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Investment in Mauritius
constraints in obtainin$ credit throu$h official channels, and that the various $overnment schemes desi$ned to financially assist 6mall and )edium ,nterprises!6),s" have not delivered because of the strict re#uirements they impose on applicants ! -nchara*,D, /010". )auritius also received poor scores for re$isterin$ property, enforcin$ contracts and closin$ a business down. Thus, shorta$es of external finance and availability of internal finance !mainly retained earnin$s" places a constraint on the level of investment. In this view the level of investment will depend on corporate profitability and availability of external credit. #) Si$e o the population -s population rises, there is $reater demand for investment, especially in the housin$ sector. Furthermore, a risin$ population will increase the labour force, leadin$ to a fall in wa$e rate and hence prospective yield of investment capital will increase. The si*e of the population is also an indicator of potential demand for the investor+s output and whether there is a possibility of economies of scale and efficient use of resources. Investment responds positively to market si*e !6eetanah and 6awkut /011, p./>".

%) &ar%et access and openness %referential market access to the ,uropean <nion, the <nited 6tates and -frica makes )auritius a uni#uely competitive investment location. Followin$ the end of the otonou -$reement in December /00>, )auritius entered into an interim ,conomic %artnership -$reement !,%-" with the ,<. The -$reement extends the trade facilities that were available under the former otonou -$reement. )auritius is a member of the -G&- !-frican Growth and &pportunity -ct" which offers duty free and #uota free market access to the <nited 6tates. )embership in the ommon )arket for ,astern and 6outhern ! &),6-" and the 6outhern -frican Development ommunity !6-D " allows duty4free and preferential access for )auritian products to an immediate market of over ;00 million consumers in the fast4$rowin$ -frican market !(&I, /012".

Investment in Mauritius
l) 'overnment policy The $overnment can encoura$e investment and also influence its allocation to various sectors by usin$ fiscal or monetary policies. In )auritius the $overnment has facilitated investment by makin$ re$ulations and administrative procedures less strin$ent for investors. For instance, the $overnment created the (oard of Investment as a one4stop shop for FDI and enacted the (usiness Facilitation -ct!(F-" which brou$ht about far4reachin$ reforms aimed at remedyin$ macroeconomic imbalances, openin$ up the economy, facilitatin$ business, improvin$ the investment climate and mobili*in$ FDI and expertise. The (F- alon$ with the Finance -ct of /00; eliminated numerous layers of bureaucracy hinderin$ investment. )auritius has si$ned various Investment %romotion and %rotection -$reements !I%%-s" with several -frican countries which typically provide $uarantees a$ainst discriminatory expropriation, arbitrary cancellation of licences, free repatriation of investment capital and returns, and arran$ement for settlement of disputes between investors and contractin$ states. To miti$ate the impact of the financial crisis on )auritius and to offset the reduced investment by the private sector, the $overnment invested a substantial amount of money in infrastructure, education and purchase of aircraft. Due to this, the investment rate increased from /8.; percent in /003 to /7.8 percent in /00? !Tandrayen,A, /011".

m) "axes

)auritius has one of the lowest income and corporate tax rate in the world. The corporate tax rate has been pro$ressively reduced from /7 percent to 17 percent between /007 and /00>. -s of =uly /003, twenty different schemes spannin$ all the ma'or sectors of activity were operational. )ost of these schemes are aimed at attractin$ export oriented investment and promotin$ exports of manufactured $oods. They offer a common packa$e of fiscal incentives, includin$, in addition to a flat 17 percent corporate tax rate, duty and A-T exemption on raw materials, inputs and e#uipment. The tax level in a country influences the decision of investors and hi$h investment levels are expected to deter investment.

Investment in Mauritius

The Investment function

IBACf !IBT5, GD%, ,5, 6-A, (<6,D%, T, 9, 6& I-%&:I, 6&<5 ,FIB, 6IE,&F%&%, )-5F- , G&A,5B)%&, T-D"

.here@ IBA is the rate of investment or the cost of capital IBT5 is the interest rate GD% is a proxy for economic $rowth
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Investment in Mauritius
,5 is the exchan$e rate 6-A refers to savin$s rate (<6,D% refers to business expectation T, 9 is technolo$ical pro$ress 6& I-%&:I refers to socio4political stability 6&<5 ,FIB means sources of finance 6IE,&F%&% refers to the si*e of the population )-5Fmean market access and openness

G&A,5B)%& is $overnment policies T-D refers to corporate tax rate

Investment in Mauritius

Conclusion )auritius is amon$ the most competitive and successful economies in -frica and actively seeks forei$n investment. The success of investments in )auritius, both local and forei$n, have been lar$ely influenced by its efficient infrastructure, GD% rate, state of technolo$y, sound le$al systems, fiscal incentives, political and socio4economic stability, $overnment policies favorable to forei$n investors and a stron$ pro4investment climate.

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Investment in Mauritius

!e erences( Thakoor, A., (ank of )auritius, The impact of the Africa Growth and Opportunity Act and the phasing out of the Multi Fibre Agreement on the Mauritian economy.

(ank of )auritius, Mauritius: Investment Climate tatement !"##$/011, p.741>.

.orld (ank /012, smarter regulations for small and mediumsi%e enterprises$ &ashington$ 'C$ /012.
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Investment in Mauritius
5a$hoobur4Tandrayen, A, Facing the Global Financial Crisis ( )olicy *essons and+ecovery from mall Mauritius$ /011, p./480.

6eetanah, (. and 6awkut,5., The determinants of FDI in Mauritius: a dynamic time series investigation, African Journal of Economic and Management Studies, Vol 2, no. 1, 2011.

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