An Analysis Of Foreign Direct Investment (FDI) In MEFMI Member Countries

By Onelie B. Nkuna
March 2009
The paper aimed at analyzing Foreign Direct Investment (FDI) in selected MEFMI member countries which are; Malawi, Tanzania, Zambia and Uganda. The results show that FDI in MEFMI member countries is uneven, reflecting the influence of different factors, mainly availability of high value mineral resources. Most of the FDI is sourced from OECD countries. In the Sub Saharan Africa, however, it is only South African and Kenya (which is a MEFMI member) that invested in the selected MEFMI member countries. There is a general bias of FDI towards manufacturing and services, and mining in mineral rich countries, but little foreign investment has gone to the agricultural sector.
From the investors’ perceptions it was found that political and economic stability and access to domestic markets were the main factors that influenced foreign investors to locate their investments in these countries. Empirical analysis, however, found that apart from the two factors identified by foreign investors, infrastructure development, openness to trade and capital, and corruption were significant determinants of FDI in the selected MEFMI countries.
An analysis of the impact of FDI on various socio-economic indicators was very mixed. The study found that FDI would positively impact on growth dependant on a country’s other factors, particularly macroeconomic fundamentals. Whilst it was found that it increased unskilled job opportunities in some countries, in other countries the impact was found to be very minimal. The analysis revealed that the impact on poverty reduction was largely dependent on jobs created and particularly the type of recipient industry that is whether the industry is capital or labour intensive. The impact on technology and skills transfer was also very limited. Whilst on one hand, FDI has somewhat enhanced labour and environmental practices, on the other hand, FDI has not generally facilitated regional integration.

Notwithstanding the aforementioned, there is a possibility for MEFMI countries to realize the potential benefits of FDI, provided that other host-country policies and strategies are appropriate.
A review of the collection and compilation process of FDI in the context of foreign private capital flows surveys in the selected countries, shows that countries were facing generally similar challenges. These include; financial constraints, bulkiness of the questionnaire, investors’ survey fatigue, externally developed data software, among others. This notwithstanding, countries registered some success stories. These include, institutional coordination giving the surveys a sense of national character, massive sensitization campaigns, grouping enterprises into sizes and frequent follow-ups enhanced response rates, establishment of a separate division in Tanzania and Uganda enabling these countries to conduct regular surveys.
In view of the foregoing analysis, this study argues that the onus is on policy makers if MEFMI countries are to attract more FDI, and to a greater extent if they are to fully maximize the benefit from FDI. Among the policy actions required to be undertaken include; improving the investment climate, engaging in public-private partnerships. On labour policies, it will require granting incentives to investors to provide relevant technical education and also integrating HIV/AIDS into various national programmes. Regionally, it will require engaging in joint regional initiatives and policies in relation to FDI and other socio economic objectives. Above all, the most important factor is for policy makers and implementers to have more political will.