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Feature Article of Wednesday, 24 October 2001

Columnist: Ernest Marbell

The flow of FDI to Ghana.

by Ernest Marbell (UN, New York) and Alfred Tsiboe-Darko

In the wake of the terrorists assault on America on September 11, it becomes very apt to think about its economic impact on the rather compact global economy even so as the US is epso facto the reigning dominant hegemon. America might find solace in the expression of corporate and concerted support by a large section of the international community and corporate bodies, bad economic news hangs gloomily over the financial world. This is not because the attacks will themselves have such direct economic effects. The trouble is that they have come at such a fragile moment for the American and the world economies. But even without the shadow of September 11th, the truth is that the global economy has been facing a worsening outlook for many months now. Indeed, since the world's economies are unusually synchronised at present, the sharp slowdown in America means that the global economy is on the verge of its first recession since 1990.

Even if America’s recession is short-lived, this could be the worst global downturn since the 1930s. I can give an example that now FDI itself is dropping as a result of the downturn of the US economy before and mainly after the attack.. What then should governments do to avert the worst effect of this imminent recession?

It is in this regard and in consideration of changing political climate, ongoing policy work in the areas of trade and investment in Ghana, that this article will attempt to examine the linkages between international firms and local firms and to find out how best Ghana can braze itself for the ‘recession storm’. The economic dynamics in all this is that there is a hastened need for Ghana to work extremely harder to attract any FDI.

For over a decade now, the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Reports has tracked trends in world investment flows, economic interconnectiviness and the attendant policy developments at the national and global levels. Underpinning trends in national investment and international investment flows has been a strong tendency towards liberalisation in trade, investment and finance related policies. This years UNCTAD World Investment Report 2001, examines the linkages between foreign affiliates of multinational enterprises and local firms. Linkages between foreign affiliates of foreign firms and local firms provide the most efficient channel for maximising the benefits of Foreign Direct Investment1 concludes the report.

Foreign Direct Investment (FDI), the main driving force behind globalization2 , grew by 18% in 2000, faster than other economic aggregates like world production, capital formation and trade, reaching a record 1.3 trillion dollars. The expansion, pace and destination of Foreign Direct Investments globally were dictated by trans national corporations of which there are over 60,000 with over 800,000 affiliates world wide. Within the developed world, the European Union, the United States and Japan accounted for 71% of world inflows and 82% of FDI outflows in 2000. The share of FDI flows to developing countries declined for the second year running to 19%, compared to the peak of 42% in 1994. The 49 Least Developed Countries3 of which 34 are in Africa remained marginal in terms of attracting FDI, accounting for only 0.3 per cent of world inflows in 2000. FDI inflows into Africa declined in 2000 from 10.5 billion dollars to 9.5 billion dollars which means that overall Africa claimed less than 1 per cent of the global FDI pie, so that although FDI flows reached record levels in 2000, a mapping of the geography of FDI patterns show that international production evaded Africa. It also indicates indirectly the distribution of benefits from FDI and underlies the importance of FDI in the implementation and formulation of economic strategies and policies of national governments. To improve this situation, and to achieve sustainable poverty-reducing growth and development, external resources must reinforce domestic efforts and resources.

Foreign Direct Investment is of particular importance in this respect as it can bring not only much needed additional capital but also access to technology and know-how, as well as access to international markets. These assets are key for economic growth and development and for better integrating developing countries much more into the global economy. Indeed, foreign direct investment can directly contribute to the upgrading of the productive capacities in developing countries. As policy makers in the developing world confront the ever changing world market scenerio caused indeed by globalization, there is a heightened need for effective strategies to attract more FDI, and putting it to maximum effect. It is an established truism that globalization will stay with mankind for a while if indeed, not forever us pro-globalization theorist proclaim. Thus, in order to make good the benefits of Foreign Direct Investments it is important to shrug aside the antipodal debate regarding the merits and demerits of globalisation and find out how much can be done on the part of policy makers to attract and make good the benefits of Foreign Direct Investments.

How then do policy makers make good on this claim? A look at the top 10 countries attracting FDI flows suggests a particular pattern and paints a picture of the way ahead. Most of the top FDI sourcing countries have large, strong and open economies. Where there is a lack of strong markets the deficit is replicated by abundant natural resource endowments. Angola, Nigeria and Mozambique are a case in point. Malaysia, Costa Rica, and Hungary are in the top 10 bracket largely down to their “balanced” index, meaning an index of one, with their shares of FDI flows exactly matching their average shares of world GDP, employment and exports. Ireland has surged from a relatively unknown economic might into a technological marvel because it has targeted and attracted FDI to upgrade its technological and export structure, in combination with enhancing its human resources. “Creating a centre of technology-intensive manufacturing and software activity” as, stated in the World Investment Report 2001. Thus geographical concentration of FDI often reflects the size and economic strength of the recipient economies. The drivers of FDI location have important policy implications at the regional national and local level.

Where does Ghana stand on the geographical landscape of FDI flows? A look at current statistical data suggests that Ghana has had a mixed experience. Between 1989-1994, Ghana’s inward FDI flows, as a percentage of gross fixed capital formation, grew at an annual average of 6.1%. This percentage reached its peak in 1996 at 8.4% and there after steadily declined to almost half in 1999 at 4.0% compared to the peak of 8.4% in 1996.

Ghana has made major policy efforts in the 1990s to attract foreign capital. Within the context of World Bank and IMF economic reform programmes Ghana undertook widespread economic liberalization in a bid to attract FDI inflows and solve the problem of economic stagnation and decline. But as restrictions on foreign investment and free enterprise were removed, purely commercial considerations, as well as imperfections in the workings of international capital markets were exposed creating a pessimistic outlet for FDI. This may account for the decline in FDI inflows into Ghana after 1996, which coincided with the peak of structural adjustment policy implementation in Ghana. Thus while structural adjustment programmes have been applied in Ghana more intensely than its neighbouring countries like Nigeria, Cote Devoire, and Togo, Ghana has exited from the programme with far less success than envisaged.

This does not go to say that there is a lack of profitable investment and lending opportunities in Ghana. However if we take a look beyond the national contraints and pay attention to emerging markets in recent years, it becomes evident that FDIs are particularly deterred by risks, which are rooted in the vulnerability of shocks and also high levels of external debt. Sub-Saharan Africa’s external debt of about $206 billion dollars as of 2000 examplifies the reason for such deterence. Ghana’s external debt stood at 4.2 billion dollars by 1991. Initial cost of asset development, lack of business support services and the general underfunding of physical, social and administrative infrastructure within Ghana are also important factors negatively weighing on potential foreign investors. But it will be pertinent to say that elimination of the external debt overhang could play a significant role in raising Foreign Direct Investment and economic growth in Ghana.

Clearly the way forward demands a policy turn around. If one assumes that the general pessimism surrounding investment in Africa still holds then it will deem logical to change attitudes and minds in the international arena. This is because there is a general lack of awareness and indeed attention given to developing countries by business information services and risk-rating agencies in recent years and in such a climate of uncertainty regarding investment opportunities in developing countries and objective documentation, negative assumptions prevail especially in the current atmosphere of global financial uneasiness. The misconception that “Africa is not ready to do business” will continue to persist unless deliberate measures are made to reverse this ignorance about investment in Africa and Ghana in particular.

The question then arises as to which of the strategies put forward by the WIR 2001 should Ghana follow? There are three main strategies recommended by the WIR 2001 report. The report recommends a critical review of investment promotion strategies. In the first generation of investment promotion policies, countries simply liberalize their FDI regimes by reducing barriers to inward FDI, strengthen standards of treatment for foreign investors and enhance the functoning of markets. Two, active “marketing” of countries as locations for FDI and lastly a more targeted approach that carefully seeks to match the advantages of individual countries and of specific locations within them with the needs of specific foreign investors in mine. Yes, liberalize and market your country to foreign investors but beyond that, target foreign investors in accordance with your country’s development priorities at the level of industrial firms and meet the specific locational needs of transnational corporations. This is the “promoting linkages” message that the World Investment Report 2001 epitomizes.

But while such a targeted approach is difficult and inevitably takes time, nevetheless this targeted approach is increasing growing in magnitude and successful models have cropped up in hitheto unknown and unheard of locations to make them new sources of FDI flows. Singapore has become a financial services haven by simple using such a targeted approach. In todays rapidly changing and current atmosphere of global financial uneasiness you cannot aim for anything and everything. Instead country specific needs must be matched with available partners in the global financial market.

Ghana can claim to have gone through the first phase of investment promotion policies, which simply involves liberalisation of policy and regulatory frameworks in order to attract more investment, but while passive liberalisation is important to attract FDI it is not sufficient in the increasingly competitive world market for FDI. It is about time Ghana started marketing itself actively as locations for FDI. Of course, foreign direct investment is no panacea. It cannot solve the underlying problems facing the country. But it can play a greater part than it presently does in the development process of the country, contributing to job creation, upgrading of the enterprise sector and increasing living standards.

The strongest channel for knowledge and technology from foreign affiliates to reach the country would be through the ‘linkages’ formed with our local firms and institutions. For Ghana this can happen through subcontracting arrangements reached with foreign affiliates in the form of components or services being sourced from local firms by foreign affiliates. These linkages form the basis for FDI benefit because supply chain management has become critical for the competiveness of large firms. By sourcing local suppliers TNCs create a comparative advantage over their rivals who source inputs abroad. It thus becomes imperative that the government make efforts to encourage foreign affiliates to use local suppliers. In particular, specific obstacles to the linkages formation process by raising the benefits and/or reducing the costs of using domestic suppliers.

The World Investment Report 2001 exhorts as to think and belief that, despite obvious constraints of limited purchasing power and scarce technological and human resources, there is a potential for higher foreign direct investment flows to the country especially from transnationals who where hitherto sceptical of the former regime, such flows are on the rise, indicating that a number of companies have indeed recognized the investment opportunities that exist. But to realize the full potential for more investment flows to Ghana there is the need for, a stable political system with a government, which respects the role of business; an efficient and honest bureaucracy; flexibility of relative prices to reflect market signals and legislative framework for business.

1 - An investment in a country involving a long-term relationship and control of an enterprise by non-residents. It is the sum of equity capital, reinvestment of earnings, other long-term capital and short term capital as shown in the balance of payments.

2 -In economic terms, the process of increasing integration of national economies at the global level.

3 - The 49 countries classified as "least developed countries" by the United Nations are the world's poorest, with per capita GDP under $900, and with low levels of capital, human and technological development. Although they account for nearly a quarter of the world in terms of the number of countries and more than one tenth in terms of population, their share of world GDP is less than 1 per cent.





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