Investment Promotion - 2023

I. What is investment promotion?

- a long term investment involving a long term relationship & reflecting a lasting interest
& control by a resident enterprise

• There is an increased attention for the attraction of foreign direct investment

(FDI) – especially developing countries.

 This is reflected in many countries by the establishment of Investment

Promotion Agencies (IPAs) & other associated institutions

 Also, the increased mobility of factors of pdn across countries (e.g because
regional integration or elimination of trade barriers, etc ), has necessitated
FDI to be integral part of a firm’s strategy to expand international business.

 FDI – occurs when an investor based in one country (home country) acquires an
assets in another country (host country) with intent to manage it.
 Involves movement of capital across national frontiers, which gives the
investor control over the assets acquired.

 Foreign direct investors participate in strategic decision-making of the local

firm.

 Inward vs Outward Investment Promotion

• FDI mainly classified as either Inward or outward.

• Outward is domestic firms investing & taking control over foreign assets.

• Inward is foreign firms taking control over domestic assets

 Why engage in Investment Promotion
 Contribution of FDI to local economies (Benefits of FDI)

The potential benefits to the host countries include some of the following:

I.Resource –Transfer effects

FDI makes positive contributions to host countries

a. Employment creation
 FDI - most expedient way to reduce unemployment in chosen regions
of a country
•E.g. govt tried to speed employment creation in S/Phikwe (coz of closure of copper-
mining in 2017 through S/Phikwe Economic Diversification Unit (SPEDU), whose
mandate has been to attract investment in the area.
• A Memorandum of Understanding (MoU) was signed btw Brite Star Aviation - USA

(aircraft mfg) with SPEDU, Civil Aviation Authority of Botswana , BITC, Selebi-Phikwe

Town Council , BIUST (Botswana International University of Science & Technology) &

Ngwato Land Board - September, 2017.

 This was one way to attract investors to Selebi-Phikwe to keep SPEDU region

economically vibrant & sustainable &

 also contribute towards country’s economy.

However, it took time much to complete an environment feasibility study (authorities had to

assess the environmental impact of aircraft manufacture in the Selibe-Phikwe region).-

The strategy was not successful.

  Employment creation can be direct or indirect

 e.g. direct employment is when citizens are employed by

Foreign subsidiaries

 Indirectly, because of FDI , more local suppliers are needed

hence the more the suppliers the more citizen are employed

b. Capital Formation

 Capital flows are especially beneficial to countries with limited

domestic sources or restricted opportunities to raise funds in the

world capital markets (e.g. countries that are in so much of heavy

debts )
c. Technology transfer

 transfer of systematic knowledge for pdt manufacture, rendering a

service, etc

 For technology to exist, research & development has to be done

 Many countries do not have resources (funds & manpower) thus

FDI helps

 e.g. mineral prospecting companies (De-beers in Botswana)

d. Management
Foreign trained management can help improve efficiency in local
operations
  Alternatively local managers may be trained to occupy management
positions in (local) foreign firms (FDI)
o Thus when they leave their employers they may establish better
indigenous firms
 Only a disadvantage if high jobs are reserved for foreign nationals

II. FDI & balance of payment

 Imports & Exports

 FDI might act as a substitute for imports (Thus not much outflow of
foreign currency to foreign markets)

 FDI may be subsidiaries used to manufacture good for exports

III. Industrial Diversification
 FDI can serve an industrial diversification purpose

 & to avoid dependence on one or few sectors of the economy

IV. Effect on competition and growth

 FDI formed on green field (no acquisitions, joint-ventures or mergers) then
more competition is created in the country
 Competition results in efficiency. Firms are forced to reduce costs of pdn
thus enabling lower prices

 Results in increased consumer economic welfare (pple can afford more

with less money)
  Competition also encourages profits reinvestments (e.g. in new method
pdn or new equipment, R&D, etc)
 Each firm struggles to gain competitive advantage

 This has effect on the overall economic growth (more innovations &
consumer choice)
 Also increases productivity & may strengthen infrastructure, etc

V. Spin off new investments

 FDI can potentially act as a key driver of indigenous enterprise
development
 It can spin off new investments
  It can help improve quality & service standards;

 It can spin new investments by establishing links with technical

research institutions & by developing suppliers of goods & services
(e.g. establishment of SEZs might attract suppliers of input into these
SEZs, etc)
 Can constructively influence education & skills training policies on a
national level (More professionals needed - e.g. link btw Brite Star
Aviation {Aircraft Mfg} & BIUST- {Science & technology
Institution}) .
• However all of these benefits do not necessarily accrue in all investments.

• There is need for strategic policies & promotion that foster & encourage them
so that mutual interests are served (i.e. for Foreign Direct investors & the
country promoting FDI)
• Potential Drawbacks of Inward investment (Costs)

i. Adverse effects on Competition

 Some foreign subsidiaries may have even greater power over domestic
firms
– Will drive domestic firms out of business hence mkt monopoly
» can draw funds from mother company to help subsidize costs &
hence cut prices

 FDI can be in form of acquisitions & mergers

– does not create a competitive environment & leads to monopoly
– Monopoly hikes prices - harming economic welfare of the
consumers / reduction in consumer choice
ii. Adverse effects on balance of payment

 FDI bring into the country capital inflows

 But income received by this foreign coy is repatriated to home country

– creates a debit on part of host country

– some govts. restrict repatriation & request for reinvestment

 Some subsidiaries import most inputs hence debit increase on the current
account of the host nations
iii. National sovereignty and autonomy

 Worry that FDI can lead to loss of economic independence

 Host country - no real control over parent coy & most of decisions taken
in foreign subsidiary
 Parent coy may not have much commitment in the host nation