The Zambian Economy’s Benefits from Foreign Direct Investment Free Essay Example

Discuss the extent to which the Zambian economy has benefited from using FDI, cite examples Development process must encompass improvements in production of goods and services which essentially aim at raising the standards of living of society’s social, economical, political, environmental and administrative structures (Gabas, 1993), with development comes improved education, health, social and economic benefits of the citizenry. However, for development of the country to take a predictable route, the economic activity must show increase over time. Economic indicators such as Gross Domestic Product (GDP), National Income, Inflation, export balance of trade, balance of payments, budget deficits and employment opportunities all demonstrate economic vibrancy and viability of a nation.

These depend on supply and demand of goods and services in the nation’s major economic sectors such as mining, service, agriculture, tourism and manufacturing industries.

Therefore, development can be described as a general process of capital accumulation through investment and reinvestment which ultimately translates into improved economic indicators and improvement in quality of human life.

Foreign direct investment, in its classic definition, is investment by a company in production located in another country either by buying a company in the country or by expanding operations of an existing business in the country (Todaro 2006). Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as lax exemptions offered by the country as an incentive for Investment or to gain tariff free access to the markets of the country or the region.

Foreign direct Investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.

According to the Longman Dictionary of contemporary English, investment is defined as the use of money to get a profit or to make a business activity successful or something that you buy or do because it will be useful later. Foreign investment is use of money from another country or multinational corporations to increase capacity for local company (Longman Dictionary of contemporary English). In the Wikipedia the free encyclopedia, FDI is defined as “Investment made to acquire lasting interest in enterprises operating outside of the economy of the Investor.” FDI or direct Investment abroad relationship consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). United Nations defines control as owing 10% or more of ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm (http://en.wikipedia.org/wiki/foreign direct Investment).

It is very clear from the onset and based on the definitions that when one refers to foreign direct Investment, in essence it means investment of multinational or transnational companies into the economy of third world countries. Developing countries have strongly been recommended by International organizations and other external advisors to rely primarily on foreign direct investment (FDI) as a source of external finance. It is argued that FDI is superior to other types of capital inflows in stimulating economic growth (Nunnen Kamp, 2003). It is argued that foreign investment brings with it technical expertise and access to foreign markets, creating new employment possibilities. Foreign companies also have access to sources of finance, especially important in those developing countries where local financial institutions are weak (Sliglitz, 2002).

Although foreign companies have access to international finances, this does not trickle down to local entrepreneurs so that their potential could be expanded and begin to compliment the various economic efforts. In effect what it then means is that third world countries like Zambia ought to develop sound economic policies among requirements needed to attract FDI. As countries in the third world continue to strive in economic development, they must prioritize and protect the indigenous infant industry for posterity. With a well orchestrated country’s economic management and development of technical institutions, it is envisaged that now technologies will be embraced which will foster and sustain development. The extent to which multinational enterprises transfer modern technology and know-how to their foreign affiliates may depend on the host countries institutional development, which captures factors such as the rule law, the degree of corruption, the quality of public management, and the protection against properly rights infringements and discretionary government interference (Nunnen Kamp, 2003).

Institutional capacity has not worked to the advantage of many third world countries, Zambia included. This has not bothered the Investors as they continue to build manufacturing and processing industry in their local economies without necessarily being bothered by the level of infrastructural and Intellectual development in country of Investment. Todaro, (2006) observes that the foreign investment and activities of multinationals in the economy especially of third world countries lowers domestic savings, stifles competition, fails to reinvest much of their profits, and inhibits expansion of indigenous firms that might supply then intermediate products but instead opts to import these goods from overseas affiliates. FDI is also considered as a way of dealing with adverse terms of trade. A country with higher levels of FDI will most likely be exporting finished products. This is only possible in an economy with manufacturing and processing industrial base unlike Zambia which cannot add value to the raw material such as copper.

This raw material in Zambia is extremely exploited by foreign multinational who continue to externalize profits without investing in the manufacturing and process industries. FDI thrive on trade liberalization which encompass among others free movement of goods and services, tax policy, privatization, social amenities including stability in social, political and economic setup of the country as the case may be for Zambia. Other factors are market size, skilled human resource and natural resource endowments. The FDI comes only at the price of undermining democratic process. This is particularly true investments in mining, Oil and other natural resources, where foreigners have a real incentive to obtain the concessions at low prices’ (Stiglitz, 2002). This characteristic of the Zambian mining sector which even with the high copper prices is still not ready to pass on the benefits to the country and its citizenry.

While the Investors are becoming richer as a result, the custodians of these natural endowments are wallowing in abject poverty. With the application of the above, it goes without saying that foreign Investors are not obligated to invest in physical infrastructure as trade is liberalized and anything can be imported into the country at a lesser cost than when it is manufactured locally. The argument continues that a smaller population cannot handle a particular level of production. While this is fundamentally correct, if a nation has to develop, it ought to begin creating these abilities with whatever parameters available. This should also be extended to the development of human resource and infrastructure for technical skill. With the advent of multipartism (1991) in Zambia, the economy has been opened up leading to trade liberalization, removal of foreign exchange controls, public service reform and privatization and foreign ownership of companies and industry with less government involvement in economic management.

This was believed to bring in the much needed capital from outside the country as opposed to economic growth based more on local strength supplemented by FDI rather than relinquishing the economic power in the hands of foreign investment. The World Bank (WB) and the international monetary fund (IMF) have been very supportive for this process as it removed trade barriers to allow for free movement of capital, goods and services including many other economic incentives. This economic arrangement is also applauded by the Washington consensus which states “growth occurs through liberalization free up markets.” Privatization, liberalization and macro-stability are supposed to create a climate to attract investment (Stiglitz, 2002). Close examination reveals that none of these key elements reflects on shared growth and does not mention elimination of absolute poverty for the full complements of development to be achieved.

Driving the several components of consensus was the conviction that government was more likely to make things worse than better (Todaro, 2006). With encouragement from World Bank and IMF the Zambian government became even more determined to completely liberalize the economy and increased its call on foreign investors to come and invest in Zambia. I must be hasten to mention here that while incentives were being proposed for foreign investors there wasn’t much emphasis and enthusiasm amongst the local and indigenous investors. The only options attainable was to merge with the new entrants in the economy and investments such as management buyout (MBO schemes which look place only those companies that had entered or showing economic malaise or fatigue while the vibrant and nerve Centre businesses and industries were sold to the so called investors as local business and individuals had inadequate capital formation to Invest in or buy companies that were highly vibrant.

The other implication with this arrangement was that while foreign investors were benefiting from reduced tax including zero tax for some commodities, the local businesses were not exempted leading to unfair competition and ultimately recession of local companies such as FURNICOZ, refined oil product (ROP) as a result of high production costs compared to imported communities. Other companies which could not compete with cheaper imports included Mansa batteries, agricultural schemes to mention but a few. This lead to reduced employment opportunities as companies continued to decline on the performance scale with more people being declared redundant. This scenario expanded economic capacity in other economies such as South Africa which has become the supply core and our economy is highly dependent on it. The ripple effect for Zambia was the closure of strategic companies and immediate economic recession.

With FDI comes a new level of competition, however, piece competition may lead to obliteration of competitors especially if foreign direct Investors take over superior market power. In the long run, the host countries balances of payments are likely to deteriote through the repatriation of funds since market–seeking FDI often does not generate export revenues, especially if the protection of local markets discriminates against exports (Nunnen Kamp, 2003). This is typical of the Zambian scenario as earlier alluded to and companies closed due to lack of government support in form of tax relief. Balance of payments has only gotten reprieve as a result of debt cancellation otherwise it would have been unmanageable. The high taxes have not encouraged local investment and almost all business are aggressively becoming trading agents of South African conglomerates.

Opponents of FDI note that multinational conglomerates are able to wield great power over smaller and weaker economies and can drive out much local competition. This has effectively taken precedent in Zambia. This is due to the fact that while local businesses have problems in accessing capital, the foreign investment has access to capital through international lending institutions (Stiglitz, 2002). Of the many apparent facts that, it is well documented that in the past fifteen years, Zambia has not only had structural adjustments to its economy but has also continued to try and be an attractive destination for FDI by improving the standards of treatment and incentives given to foreign firms at the expense of local firms.

Zambia has assured foreign investors through investment Act that their investment will not be adversely affected by any changes in the investment act for a period of seven years and that property rights shall be respected. It further states that no investment of any description can be expropriated unless parliament has passed an Act relating to the compulsory acquisition of that property. In case of expropriation, full compensation shall be made on the market value and must be convertible at the current exchange rate (Investment Act of 1993).

Conclusion

One of the weaknesses of FDI is that it is not locally bred, it is not African let alone Zambian, it is a foreign bred concept and is the more reason why nations keep changing the approaches to social and economic development to be in keeping with new ideas as determined by the developed countries who are the major players in FDI. Indeed this is the biggest undoing for the Zambian economic set up is the inconsistency in economic policies and the change of the economic agenda and direction by successive government. Preferential treatment of foreigners in investment opportunities has lessened investment appetite for the locals with no interest in setting up of new manufacturing and processing industries. Without this process, the country in its current state will continue being a trader, consumer and high importer of products at a very high cost which can easily be manufactured locally with a little encouragement to the local investors.

This can be seen as the country continues to order commodities such as poultry, vegetables, and fruits including products like crisps that were once produced by speciality foods. As the law is Lax on what kind of foreign Investment is appropriate for the country, the nation has recorded a huge influx of Chinese nationals who have come to engage in economic activities ranging from such insignificant economic activities selling cabbage to bring unskilled laborers in some projects within the country not to talk about their involvement in selling second hand clothes.

The economy of any country can only be developed by indigenous citizens and not the so called foreign investors who only think about how much they can rip from Zambia as they continue externalizing the profits. It is therefore, incumbent up on the government to protect its citizens together with its economy and create an environment which will make it possible for them to effectively participate in the economic emancipation of the nation.

It will be prudent for governments of third world countries to develop stringent measure to regulate foreign Investment and agree upon terms that are going to mutually benefit both the investor and nations were they are operating. It is imperative for national governments to priorities local investment and endeavour to create a favourable environment that will help in developing indigenous industries as well as capital accusation for future Investments. The Investment policies that are enacted must be favourable for the local people as well to stimulate and rejuvenate interest of the locals in participating is that externalization of profits is eliminated thereby promoting and nurturing meaningful and tangible economic development.

References

1.Foreign Direct Investment: What difference for Zambia? Jesuit Centre for Theological Reflection Bulletin No.50 http://www.jctr.org.zm/bulletins/for-di-invest.htm. 15th September 2007

2.Gabas, J.J. (1993, January-February). Dossier: Aid and development – where the twain shall meet. The Courier. 137, 100.

3.Investment Act No. 39 of 1993.

4.Lipalile, M. (2006). Foundation of Development Studies, 2nd edition: Zambian Open University.

5.Longman Dictionary of Contemporary English (2006). Edinburgh: Pearson Education.

6.Nunnenkamp, P., and Spatz J. (July, 2003). Foreign Direct Investment and Economic growth in developing countries: How relevant are host-country and industry characteristics? Kiel Institute for World Economics Duesternbrooker Weg 120 24105 Kiel (Germany). Kiel Working Paper No. 1176.

7.Todaro, M.P., and Smith, S. C. (2006). Economic Development, 8th edition. New Delhi, India: Pearson Education.

8.Stiglitz, J. (2002). Globalisation and its discontents. London, England: Penguin Press.