Investment: measure quality, not quantity.

Author:Baer, Felix
Position:This Month's Prize Letter - Letter to the Editor
 
FREE EXCERPT

I was very interested to read in your magazine of the massive growth of global foreign direct investment reaching Africa (Africa's Hunt for Investments--African Business, December 2003 issue).

In this article you say that the rule of thumb seems to be that "the more FDI, the greater the prosperity; little or no FDI equates to a lack of growth and often poverty". Few would disagree with that statement, but my own view is that it needs some qualification. That is because we should not just measure the amount of FDI that Africa receives; rather, we should attempt to measure the quality of that investment.

Measuring that quality is in some ways a non-scientific exercise, but there are some parameters that are worth assessing.

Clearly, one of the first criteria should be the term of an investor's commitment. In the article it is stated that FDI is "investment made by transnational corporations on a long term basis". Well, that is not always the case. Remember how the South African transnational corporation, Anglo American, made a massive investment to take over Zambia's state-run copper mines only to pull out a couple of years later?

[ILLUSTRATION OMITTED]

There is an inherent problem with FDI flowing into a country's extractive industries sector (which accounts for much of Africa's FDI) because extractive resources are essentially finite. So when a mine is exhausted, or an oil field runs dry, investors will withdraw.

It is true that, as the article states, developing countries are becoming increasingly careful about the type of investment they wish to attract, but in the real world we have to ask how much choice many African countries really have to be as selective as they might wish.

If, say, an oil company says to...

To continue reading

REQUEST YOUR TRIAL