The Other Side of the Coin

Uganda happens to be one of those developing countries that have given red carpet reception to foreign direct investment. This is evidence in the government’s interminable will to create a conducive investment climate for foreign investors. President Museveni once reached the point of suggesting that blocking foreign investment is a treason case and perpetuators deserve to be hanged. It is therefore important to assess the significance of foreign Direct Investment (FDI) in these developing countries.

The increase in direct investment flows has laid the foundation for a marked expansion of international production by transnational corporations, 000 foreign affiliates throughout the world. It has also become an important source of private external finance for developing countries. It is different from other major types of external private capital flows in that it is motivated largely by the investors’ long-term prospects for making profits in production activities that they directly control.

Investment experts usually employ the theory that FDI brings about technology transfer to the benefit of local firms in the host country. This assertion however is not supported by research facts and does not generally apply to all countries where FDI exists. It is true some economies like China benefited but not all host countries benefit. Only countries whose economies have already reached a certain level stand to benefit from these investments.

In the mid-2000s, Kawasaki, Siemens and other European and Japanese companies began producing high-speed trains in China. China as a host country benefited from the technological transfer. The foreign investors now have competition from domestic companies, such as China South Locomotive & Rolling Stock Corporation, that manufacture trains with speeds of up to 236 miles per hour. By their own admission, the domestic firms learned from the technology and techniques of their foreign counterparts.

This kind of technology transfer is the reason many developing countries are encouraged to attract foreign direct investment (FDI) as a means of advancing their own domestic industries. To their dismay many of them end up learning nothing. Therefore the theory that technology, knowledge, and techniques brought in by experienced foreign investors and managers will spill over to locally-owned firms may remain a far fetched philosophy in most developing countries. Actually some research suggests that it may provide little net economic benefit and could actually harm domestically-owned plants.

We are all aware that FDI affects local companies. The effects can be positive as well as negative. It may change their way of doing business and the way they behave. It can affect host countries on resource-transfer effects, employment, competition and product and process innovation.

The presence of foreign investment means injection of capital and technology which stimulate competition in the local market. The good news is that it will have impact on economic growth and will take place through increased productivity, human capital accumulation, research and development activity, and technological and productivity spillovers. However, host countries are not always able to benefit from all these.

When the initial difference in technology between the foreign firm and the local firm is large and human capital is poor, the foreign firm will suffocate local unproductive competitors; this is called market-stealing effect. When a foreign company enters that market, local companies are not able to benefit,

In situations where local firms are stamped out of business by foreign firms the concerned citizens usually ask themselves one question: Where is government when local firms are suffocated by foreign investors? The long-held belief that governments favor their own country’s firms over outsiders may not hold up in today’s global business environment. Indeed, governments may actually favor foreign companies, particularly over politically weak domestic firms.

In the process of attracting as many foreign investors as possible, governments risk compromising on local firms. This is the biggest mistake. Some ‘foreign firms’ are not favoured by mistake; in countries where corruption rules the day the so-called foreign firms are partly owned by government officials.

They must therefore give their investments a competitive edge over the other local firms. There is need to level the playing field and give all firms both local and foreign equal opportunities. In order to maximize the development impacts of foreign investment, a suitable investment policy framework is needed. Otherwise the public may fail to realize the benefits of FDI.

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