Global Policy Forum

By Eric Gichira

They engage in corrupt practices, underpay workers and make them work under poor conditions. They also systematically evade tax. Meet the trans-nationals and their bid to control domestic and international markets through their direct investments.

While foreign direct investment could, on a long-term basis, bring about development (or be seen in the light of development) it is worth noting that in itself, it is not a cure for poverty. Why are African governments allowing themselves to become puppets of foreign companies and their vested special interests? It is now argued by economic analysts that changing international macro-economic structures will marginalize growth and development in Africa. Add to this the effects of the war in Iraq and the situation further becomes depressing. With liberalization having set foot in Africa, state corporations are slowly getting privatized.

The gloomy picture is that most of these corporations' shares are being bought by foreign companies or individuals. Where does this leave the locals? Foreign Direct Investment (FDI) flows to the African continent are increasing. To unsuspecting governments, their "offer packages" are sugar-coated and quite attractive from the outside. But the long-term results can be disastrous, often realized when it is too late and very costly to revise policies.

While any foreign investor has a right of establishment, of course having fulfilled the host country's government requirements, a lot of observation needs to be done when the said foreign companies start operations. The economic and social interests and well-being of the people of the host countries should not be compromised while their governments woo foreign (direct) investments. Unlike in Kenya where some sectors have been compromised (and corporations' shares sold off cheaply to foreign companies / investors), host governments need to maintain sovereignty over strategic sectors of the economy, most of which need careful development.

FDI must thus be strategically directed to sectors that benefit the host country in both short and long run basis. It is common to find some trans-nationals engaging in activities that pollute the environment in developing countries, since they have found that these countries have low environmental protection policies / standards. Similarly, African countries need well defined and adequate labour protection policies to safeguard / protect the local companies' interests from these trans-nationals. Exploitative traits by foreign direct investments have been experienced, whereby international companies undervalue local labourers. These need to be reviewed. Granted, it would in turn ensure favourable working environment where workers' rights, needs and welfare are aptly taken into account.

Just why aren't African countries benefiting much from the global trade facilitated by FDIs? Firstly, because of blindly being host to unplanned foreign direct investments. Potential investors have kept off investing in Africa citing corruption, bureaucracy, high taxes, tariffs, interests charged against their investments, slow economic growth and the region's high insecurity problems. These have, consequently, resulted to investors opting for the better performing Asian economies / markets, compared to Africa's volatile ones. Lest we forget, FDIs should contribute to investment and growth of host countries through promoting competition in domestic input market and gain in employee training, among other areas. Profits generated by FDIs hence ought to contribute to corporate tax revenues in the host countries.

Unfortunately, this is not always the case in most African countries. Cooking of books to evade tax is common practice among some FDIs. Not to mention their (FDIs') formation of cartels to frustrate local companies, sadly so, in host countries. As developing countries become more thoughtful and restrictive about opening doors to trans-nationals inward foreign investments, there's need for further understanding of their operations and interests. Bound to be affected is the host countries' domestic workforce. It is strange that some have brought immigrants (sometimes illegally) to work in their companies, at positions well capable of being handled by locals. Dozens of these immigrants even masquerade as expatriates in very executive positions. That countries claiming to offer FDIs have been known to have vested interests in developing countries with precious natural resources, is true. True also is the fact that, in some cases, opening up trans-nationals to host countries' natural resources has produced alarming political consequences, among them civil strife / conflicts. It is imperative that African countries, while encouraging foreign investments, aim at improving their domestic capital. Areas such as corporate governance, accounting rules and legal traditions also need to be streamlined. There is further need for a more realistic approach and review of international investment outflows.

Where available, the marginal outflow of FDI from developing countries rarely include African countries, let alone benefit them. According to World Investment Report (WIR) 2002, Angola is Africa's leading performing host economy for foreign direct investment. The UN Conference on Trade and Development (UNCTAD) published report also cited Belgium and China as being among world's best performing host economies for FDI. However, the inflow of FDI is good for developing countries in the following way: FDI brings about foreign exchange by increasing exports and thus add to the capital formation in host country. Free flow of FDIs regulates negative effects of competition between developing countries in trying to provide incentives to transnational corporations / companies.

FDI is good for effecting, introducing and diffusing new technologies to developing countries. It has often been noted that in some cases, this generates a spill over effect in which local firms benefit from international companies. These include technical and managerial training that they offer. The host country's product quality and promotion of effective and efficient methods of production are, in the process, enhanced. With new innovative ventures, FDI generates employment opportunities in developing countries.

On a different light, the negative effects of FDIs on sustainable growth in developing countries are many. The host country has to face many costs. Their saving ratios, subsequently, drop considerably below levels required for stable economic growth due, mostly, to unsustainable spending / consumption patterns. Dependence on these investments could therefore throttle domestic industries in host countries, given that most end up being monopolies, enjoying economies of scale, and easily undercutting the prices of profitable and successful local producers. Most FDI flows in Africa come from the U.S, France and the United Kingdom.

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