Financing the growth of Multi-National Enterprises: A case example of Uganda

By Rodney Lwanga Timothy Samora
2011
In last ten years Uganda has attracted a large number of multination enterprises (MNEs) in a number of diverse sectors. UK, Mauritius, Kenya, and Belgium have been the largest investors. The sectors that have received the largest share of investment are Transport, Manufacturing, Wholesale trading, and financial services. This study was aimed at understanding the financing patterns of MNEs operating in Uganda. To achieve this aim, a time series profile of real and financial variables pertaining to MNEs’ operations from 2002-08 was prepared. In 2008, MNEs total foreign direct equity investment in Uganda stood at $1,574 million and they had created direct employment to the tune of 125,145.

After the initial investment has occurred, the subsequent build-up of investment base can occur by way of additional issue of equity, reinvested earnings, short or long term borrowings from within or overseas sources. A popularly held belief in the literature is that MNEs bring in only a small amount of capital base but build it up with reinvested earnings generated from within the host country. This study, however, shows that MNEs entering Uganda do come in with substantial capital funds which in due course do get supplemented by reinvested earnings. The results further show that the long term amount borrowed by MNEs in Uganda is positively correlated with their investment base and turnover. The amount of loans acquired by MNEs in Agricultural and Manufacturing sectors have been declining over time while the amount of loans in services (financial, telecommunications, hotels and tourism) have been on the increase. The amount of loans borrowed by MNEs in manufacturing and services sector is much larger than those borrowed in the agricultural sector. The results from the econometric modeling of the data shows that when the investment base increases by one percent, holding all else constant, the amount of long term borrowings increase by 0.38 percent. In addition, if the amount of retained earnings realized increases by one percent, the amount of long term loans borrowed decrease by 0.26 percent.

This study has the strength that for the first time it takes a closer analytical look at the world of financing by MNEs. Similar to any other developing country, Ugandan financial system can only lend so much. Studies should be carried out to see if the domestic enterprises are not suffering as a result of liberal lending to MNEs. Secondly, although the study in aggregate terms shows that MNEs do bring in substantial funds with them, case studies of selected MNEs should be conducted to understand exactly how much funds they initially bring into the country and how much they have raised locally. Finally, as a policy recommendation, it may be high time that the government reviewed its lending policy to national and MNEs to see if this policy stands at equal par when dealing with these two sets of enterprises and that national enterprises, in particular, the smaller ones are not suffering as a result of (liberal) lending to MNEs.