DEFINING INVESTMENT Domestic and Foreign Direct Investment
Investment – Definitions What is foreign direct investment (FDI)? Foreign direct investment is the acquisition of a lasting interest, usually with at least ten percent stake, in an enterprise operating outside of the country of domicile of the investor, with the purpose of gaining effective say in the management of the enterprise. Source: Balance of Payments Manual: Fifth Edition (BPM5) (Washington, D.C., International Monetary Fund, 1993) What is domestic (direct) investment? Domestic investment is where a local company/ individual acquires a lasting interest, usually with at least ten percent stake, in an enterprise operating in their country of domicile of the investor, with the purpose of gaining effective say in the management of the enterprise.
Investment – What is it good for? Empirical studies show that FDI typically generates economic growth in the host country especially through direct employment generation, or through linkages with suppliers, subcontractors and service providers. However, there is also evidence that FDI can have negative effects. FDI is found to be favourable to economic welfare of the host country only if appropriate conditions exist in the host economy. This includes adequate absorptive capacity for instance, new financial capital and new technologies in plants, as well as human capital. Also it is important that domestic businesses are not "crowded out" and are able to face up to foreign competition. Meaning, market gaps filled by foreign companies should ideally be above what can and should be filled by home producers. This means that industrial policy - while within the rules of the multilateral trading system - should also seek to prop up infant industries to the degree that they are competitive and do not distort competition.
Investment – Some Concepts Host country … v. Home country Linkages with suppliers, subcontractors and service providers. Adequate absorptive capacity Domestic businesses are not "crowded out" and are able to Facing up to foreign competition. Discussion point: What is the role between FDI and domestic investment?
Modes of Entry Greenfield investment: a new investment expected to bring in relatively substantial inflows of FDI; new production capacity and employment; Brownfield investment: an investment into an existing facility geared towards improving or increasing its capacity, with a quick technology and skills spill-over effect; Mergers & acquisitions: inflow of FDI capital, but not necessarily new productive capacity; there are potentially spill-over effects with investment in better technology and higher productivity; Joint ventures: involve a strategic alliance between the foreign company and (usually) a local company with the view to doing business together.
Explaining FDI Motivation
The Global FDI Picture
FDI in South Africa
UNCTAD Investment Policy Framework for Sustainable Development
SA FDI Policy in Context December 15 2015 controversial Protection of Investment Act was signed. Replaces the bilateral investment treaties that SA terminated in 2012, resulting in alarm from the international investment community based in the country. On December 30 2016, Trade and Industry Minister Rob Davies published the long-awaited investment regulations that will bring the act into force. Developing countries entered into BITs to provide investors with comfort that their investments would be safe and protected. However, BITs have been criticised as creating unequal rights and obligations between developing countries and developed countries and for interfering with developing countries’ sovereignty. Accordingly, various developing countries across the globe are revisiting investment protection.
FDI Policy in SA Interpretation: The PIA must be interpreted in a manner consistent with any relevant convention or international agreement to which South Africa is or becomes a party. Accordingly, BITs to which South Africa is a party will be upheld, irrespective of the commencement of the Investment Act. Equal treatment: Foreign investors must not be treated less favourably than local investors in like circumstances . This provision may not be interpreted in a manner that will require South Africa to, inter alia, extend to foreign investors the benefit of any treatment, preference or privilege resulting from government procurement processes, subsidies or grants provided by the government or any law or measure that is designed to protect or advance historically disadvantaged persons.
FDI Policy in SA Expropriation : Foreign investors have the right to property as provided for in the South African constitution. Foreign investors’ property may only be expropriated in terms of a law of general application, and (i) for a public purpose or in the public interest and (ii) subject to compensation (the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided or approved by a court). The expropriation of foreign investors’ property must be carried out in terms of the Expropriation Act 63 of 1975. Expropriation Bill passed through parliament in May 2016.
FDI Policy in SA Repatriation of funds : Foreign investors can repatriate funds, subject to taxation and other applicable legislation including exchange control regulations. Dispute resolution : In the event of an investment dispute, an investor may within six months request the Department of Trade and Industry to facilitate the resolution of such dispute by appointing a mediator. A foreign investor is not precluded from approaching any competent court, independent tribunal or statutory body within South Africa for dispute resolution. Once domestic remedies are exhausted, the South African government may consent to international state-to-state arbitration.
Investment Incentives Schedule of characteristics for an effective and efficient investment incentive scheme: a system to ensure that revenue loss is minimised; a cap on expenditure; a time limit on the duration of the incentive; that incentives be transparent; that incentives be uncomplicated; and that incentives have low administrative costs for both businesses and government Investors may qualify automatically for incentives, or inducements could be provided on a discretionary basis. Caution: Discretionary allocation allows for economic distortions such as, favour-seeking, corruption or procedural ineffectiveness. Barbour, 2005
INVESTMENT PROMOTION
Investment Promotion circa 2000 United Nations (UNCTAD, UNIDO, UNESCAP , WAIPA) World Bank (MIGA, IFC, FIAS) Site Location Consultants Organisation for Economic Cooperation & Development Government Agencies (IPAs)
Investment Promotion Toolkits MIGA, 2001 Module 1. Understanding foreign direct investment Module 2. Developing an investment promotion agency Module 3. Creating an investment promotion strategy Module 4. Building effective partnerships Module 5. Strengthening the location's image Module 6. Targeting and generating investment opportunities Module 7. Servicing investors Module 8. Monitoring and evaluating activities and results Module 9. Utilizing information technology
Government’s Role in Investment Promotion To implement their economic development strategy, most governments try to create an optimal investment policy framework, promote activities to support investment, and establish economic incentives to positively influence investor perceptions of costs and benefits related to business in a particular sector. Inward investment promotion has included investor facilitation; national image- building; investor targeting and generation; and policy advocacy. ‘One -stop- shops’ have been adopted by IPIs offering a range of services from advisory bureaus through to authorising licences and permits, and even lobbying other government units on behalf of investors.
Investment Promotion Investment promotion, intended to inform or assist investors in making a commitment to invest, is a form of non-monetary investment incentive that is very difficult to quantify or monitor. IPAs operate in a blurred institutional environment with parallel jurisdictions and accountability to a large range of ministries at different levels of government. Not only do they themselves liaise with other government bodies but they also help investors navigate the bureaucratic waters involved in establishing a new project. Effective investment promotion presents commercially viable investment opportunities, identifying local partners and providing a positive image of the economy. Promotion should not be seen as a substitute for more general policy reforms or try to camouflage underlying weaknesses in the investment climate.
Investment Promotion Cycle
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