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

8
(No Transcript)
9
(No Transcript)
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

11
(No Transcript)
12
(No Transcript)
13
(No Transcript)
14
(No Transcript)
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 letisku alebo k
  prístavom, základné telekomunikacné služby
• Water, electricity, roads, airports and harbors,
  basic telecom services

16
(No Transcript)
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
Chinas FDI outflows to Africa
25
Comparison of FDI in Africa
26
Africa is one of the richest continents in the
world
27
(No Transcript)