- June 7, 2016
- Posted by: admin
- Category: Macroeconomic Management
By Wilson C.K. Phiri
April 2011
Zambia is highly dependent on Foreign Direct Investment (FDI) inflows, which are highly concentrated in the mining sector. This sector, however, is highly vulnerable to commodity price shocks, posing a challenge of sustainability of FDI inflows and overall economic growth. This study explored and assessed the factors that drive FDI in Zambia’s mining and into other sectors. This was done via two error-correction time-series econometric models, one for mining and another for non-mining. The findings, suggest that copper prices and external copper demand were major drivers of FDI in mining, while electricity supply was the major constraint. The non-mining sector was largely driven by the degree of urbanisation, GDP growth, exchange rate depreciation, supply of telecommunication services and the boom in the mining sector, while lending rates were the main constraints. To minimise Zambia’s vulnerability to commodity price shocks and ensure sustainability of FDI inflows, it is critical for Government to pursue a diversification strategy targeted at accelerating FDI inflows to other sectors such as agriculture, tourism, and manufacturing (non-mining-related), which are not only less vulnerable to commodity price shocks, but also contribute highly to employment creation technology and skills transfer. There is need for accelerated infrastructure development in electricity supply, roads, rail and telecommunication, among others, especially in rural areas. In addition, efforts should be directed towards sustaining robust GDP growth, maintaining a competitive exchange rate, exploring new source markets of FDI and enhancing business linkages of investors with domestic SMEs.
Key Words: Foreign Direct Investment, Drivers, Mining, Other sectors, Diversification.