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02nd
Feburary 2010
NDC INVESTMENT FORUM
Preparing for the Changing Face
of FDI
The
importance of international investment in a
country’s economy today is reflected in
the plethora of investment promotion agencies
(IPAs) which have been established across the
European Union, Latin America, Asia and the
Caribbean over the past decades. Indeed, the
business of attracting FDI to a country’s
shores has grown increasingly competitive over
the years. With the start of 2010 all countries
face the challenge of seeking out and attracting
international investments to their shores amidst
a still turbulent and uncertain global economy.
The multinational firms of the United States
and Europe, the leading sources of International
investment due to decades of the largesse of
these firms in seizing opportunities for increasing
efficiency and capturing foreign markets are
bowing under the weight of the financial crisis.
Early projections note an annual growth rate
of less than 2 percent for the United States,
Europe and Japan until 2015. Emerging markets
like China, India and Brazil, meanwhile are
expected to return to their pre crisis growth
levels with China marking 8 to 9 percent annual
growth, India 6 to 7 percent and Brazil 3 to
4 percent. As such, the period 2008 through
2009 is being identified as watershed years
for global investment with unavoidable changes
in the trends and directional flows of FDI anticipated
in 2010 and beyond.
The
changing face of FDI
For one thing, the traditional view of FDI as
a company from one country making a physical
investment into buildings, equipment and machinery
is rapidly fading. Changes in technology and
the internationalization of business has allowed
for greater innovation in capital financing.
The increasing risk aversion of firms coupled
with limited capital financing is expected to
provide the fillip for a shift in modes of investment
from Greenfield investments which involves fresh
and new equity capital investments and flows
from abroad to non equity forms of FDI involving
subcontracting, licensing and franchising arrangements.
Non equity forms of FDI do not necessarily involve
a capital flow from abroad but otherwise contribute
to private sector development and economic growth.
No matter the form, the growth or opportunity
span for all types of FDI is also expected to
be impacted in the coming years. The most directly
affected types of investment so far have been
those seeking to take advantage of consumer
markets especially in developed countries. With
the developed economies expected to experience
sluggish growth throughout 2010, companies are
expected to restrain the launching of new projects
aimed at increasing their market oriented production
capabilities there, while they remain more committed
to capacity expansion in developing countries.
The impact of the crisis on investments which
seek to take advantage of lower production costs
in another country is more difficult to assess.
On the one hand, it is expected that these projects
will suffer globally from the decline in the
financial capabilities of firms. On the other
hand, many companies might very well be compelled
by the negative impact of the crisis to further
restructure their international activities to
cut cost and boost overall efficiency. This
means above all closing or downsizing non cost
competitive facilities (often located in developed
countries), but also opening some new cost efficient
facilities, especially in developing countries.
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New
sources and partnerships evolving
Another expected change in the complexion of
FDI is where these funds are coming from. With
China, India and other Asian countries emerging
as the essential players in fostering global
growth post 2009, these countries are now being
heralded as the most viable sources of FDI in
the coming years, filling in the void left by
the battered US and European economies. In this
transition dubbed “the tale of two worlds”
it is expected that the developed economies
of the US, Europe and Canada, will lose growth
momentum, while developing economies flourish.
Already, the seven largest Asian economies which
include China, India, South Korea and Japan
(all presently considered developing countries)
now hold $US4.6 trillion in foreign currency
reserves. This total is greater than the foreign
currency reserves held by the rest of the world
combined.
These anticipated changes have meant that at
the regional and national levels, developing
countries like St. Lucia should harbour realistic
expectations with regard to the kind, quality
and amount of international investment it could
realistically expect to attract in the immediate
future. Indeed, promotional activities marketing
the island as an investment destination must
be adapted to these new realities.
Government’s central role in encouraging
international investment relates to the encouragement
of health business environment, development
of fiscal incentive policies and the rolling
out of marketing initiatives to attract foreign
investment to local shores. The availability
of incentive packages is losing its relative
importance in the investor’s decision
making process due to the rise of “regime
competition” where FDI incentives schemes
offered by most countries are only slightly
differentiated.
There remains a crucial role for the local private
sector in increasing the competitiveness of
St. Lucia as a destination for international
investment and enabling the island to ride this
wave of transition. This requires that the local
private sector remain committed to achieving
international standards in their operations
and informed and updated on local, regional
and international developments in their respective
industries.
More importantly, the local private sector must
seek to expand its reach beyond the local market
and actively pursue partnerships within the
regional and international business community.
With regard to the services sector for example,
foreign investors have displayed a penchant
for destinations with promising local suppliers,
helping them to improve quality control, reliability,
and responsiveness. For businesses with a strong
entrepreneurial spirit and innovative culture,
there is great opportunity for pursuing and
successfully capturing a place in the global
supply chains of regional and international
firms. Local firms that are competitive enough
to participate in the global supply chain are
also the most likely to break into global markets
on their own.
As 2010 unfolds, it is evident that new efforts
must be coupled with a renewed understanding
of the emerging trends in international investment.
On the home front this would mean that all stakeholders,
imbued with a renewed understanding of the emerging
trends in international investment as well as
the critical role they play in supporting these
efforts, must redouble their efforts if they
are to realize the gains of international investment
and take advantage of the opportunities ahead.
Discuss
Story
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