FDI as a factor of economic development in LDCs Ing. Tomáš Dudáš, PhD.

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)

Current list of LDCs

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

ODA – questionable effectiveness

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

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

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

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 telekomunikačné služby Water, electricity, roads, airports and harbors, basic telecom services

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…

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

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

Case study – Africa and China

China in Africa: 3 dimensions Foreign direct investment Aid Trade China’s involvement in Africa has three main dimensions: foreign direct investment, aid and trade. In each of these dimensions China’s engagement is dwarfed by those of US and European countries, and often smaller than those of other Asian economies. I would like to look at each of these here.

FDI outflows from China There has been a marked increase in FDI flows from China since 2004

China FDI flows to developing world A very small proportion of China’s FDI flows to Africa - about 3% of total flows to developing countries.

China’s FDI outflows to Africa

Comparison of FDI in Africa Foreign direct investment (FDI) of Asian economies globally has been growing. Chinese FDI in Africa has in fact been small in comparison to investment from Singapore, India and Malaysia, which are the principal Asian sources of FDI in Africa according to UNDP (2007) with investment stocks of $3.5 billion and $1.9, $1.9 billion by 2004, respectively. Such investments are greater than those of China. The same report goes on to say, however, that Asian investments in Africa are dwarfed by those of the United Kingdom (with a total FDI stock of $30 billion in 2003), the United States ($19 billion in 2003), France ($11.5 billion in 2003) and Germany ($5.5 billion in 2003). And if China sits in fourth place amongst the Asian ‘tigers’, the scale of its investments in Africa are miniscule in comparison to the more traditional imperial powers.

Africa is one of the richest continents in the world … Africa is one of the richest continents in the world with huge resources. Yet it is also the poorest.

That China is destroying Africa’s industry