Attracting Foreign Direct Investments (FDI) in Rwanda

Many ideas presented here are inspired by a paper from Jim Kenworthy’s “Foreign Direct Investment: Investor Goals, Motivations, Concerns & Decision Making Determinants” – a speaking text presented in Zambia [2004-2005]. As we are attracting more and more Foreign Direct Investments, it is worthwhile to understand what attracts FDI in order to do more of what attracts them and do less and less what repulses them. NICI stands for National Information and Communication Infrastructure. Rwanda’s NICI Plan 2006-2010 is a 5-year plan oriented towards creating an entrepreneurial-driven, investment-based, free market economy where Foreign Aid is no longer a major factor in the development of the country. This is also the kind of economy that attracts Foreign Direct Investments. Among the benefits that can be realized from FDI are: new technology; modern equipment and productive infrastructure; an emphasis on industrial productivity; an understanding and commitment to industrial competitiveness; modern entrepreneurial management techniques; modern human resource techniques, technical and management training of locals; exporting marketing know-how; provision of a significant contribution to a nation’s fiscal receipts; greater competition in the domestic market; a wider range of consumer choice for a country’s citizens. From an ancient maxim that states that: “FDI tends to follow domestic investment and domestic investment tends to follow FDI”, and from some FDI studies, Jim Kenworthy derives his first foreign investment promotion reality: “Foreign investors are unlikely to invest in a country whose own citizens won’t invest there.” The Goals and motivations of FDI investors Profit that seeks to maximize an investor’s competitiveness at home or abroad so as to realize the highest possible rate of return on investment, whether from domestic activities or from cross-border activities; one or both of two basic purposes: to create, increase, or defend market share in the host country and/or nearby countries OR to develop and control assured sources of supply of either raw materials or primary commodities or inputs needed for production of products destined for the home country, the host country or third countries. Foreign Investor Decision Making Investors’ strategic tests in deciding on location (country) and nature of their foreign investments are: Can the investor produce efficiently and cheaply for export at home than abroad? If yes, the Foreign Investor will not invest abroad. If No, the Foreign Investor will likely invest abroad. Once investing abroad, an investor that can more efficiently and cheaply sell into other country markets from a given host country than producing in those other country markets, will invest in the host country. Jim Kenworthy’s additional investment promotion and trade realities: Investment follows trade and trade follows investment. “If an investor can’t sell its products in a country, it isn’t likely to invest there”, except maybe for raw materials or primary commodities. “Foreign investors normally don’t just ‘discover’ and come ‘round’ to a country to invest there [apart from raw materials or primary commodities], rather, foreign countries must approach them and acquaint them with their country thereby to elicit their interest in that country and incorporate their awareness of it in their FDI decision making.” “There are in this world – apart from developed nations whose economies command attention of foreign investors – over 150 nations actively seeking to attract new FDI.” This means that countries must do their best to attract FDI as follows: they must somehow distinguish themselves from other countries in their region who are also trying to attract FDI; they must do a better job in understanding and responding to foreign investor concerns and decision making about whether, where and how they might invest abroad. Foreign investors concerns Foreign investors concerns include: the business climate that prevails in the host country; aspects in the host country that will facilitate or hinder the investment there; degree and nature of risk they confront in a given host country. The types of risks considered are: Normal Business/Commercial Risk inherent for commercial enterprises in any free market economy such as economic downturns resulting in higher costs or lower demand, bankruptcy or other impairment of suppliers or customers, competitive impacts of new technology; Political Risks such as political/social instability, property destruction due to civil wars or riots, expropriation or other un-compensated taking of investor property; Credit/Exchange Risks such as Government default on debt obligations, Exchange convertibility or devaluation, and/or non-market-realistic maintenance of arbitrary fixed exchange rates, Deterioration of the commercial banking sector. Real investment incentives for FDI Real incentives for FDI include: Political and Social stability; Sound, Stable, and Growing economy; Continuing progress in macro-economic reforms, particularly privatization and a facilitating legal/regulatory regime; Realistically valued, stable national currency and limited foreign exchange restrictions; Facilitative and active private business sector; Fair, transparent and non-arbitrary legal/regulatory regime; Adequate investment protection and property rights protection; a rational, transparent, non-corrupt, timely business establishment/licensing and FDI approval/admission process. Investors generally make their decisions whether to invest in a country based on a number of the real incentives above, but no one incentive alone is usually sufficient in their decision making. Real investment disincentives for FDI include: Consistent and Continuing political/social instability; Significant industry sector or geographical restrictions on FDI; Volatile exchange rates and/or rigid currency restrictions; Lengthy, un-transparent, costly business establishment/licensing or FDI approval/ admission requirements; Unchecked public or private monopolies that restrain market competition; Continuing government resistance to macro-economic reforms; Unresolved expropriation issues and/or poor investment protection and/or poor property protection; Unfair, overly-restrictive, non-transparent legal/regulatory regime with excessive discretion and arbitrary administration; Pervasive public sector corruption or rampant, unchecked criminal activity; Worsening industrial productivity; Unfair, prejudicial labor/management regime; Non-facilitative public sector Infrastructure and Capacities. Any one of these disincentives may be sufficient to stop an FDI. How can we attract FDI given the presence of disincentives, especially investment risk disincentives? Prospective investors are really more attracted by specific guarantees that cancel the negative effects of such disincentives, examples: freedom from prolonged, arbitrary, costly establishment/licensing and FDI approval/admission requirements; assurances of a treatment equal to nationals treatment; freedom to obtain and deal in foreign exchange for profits remission, capital repatriation, and current account transactions; freedom from post-investment performance requirements or revisions in incentive laws or regulations, i.e. respect for acquired rights; adherence to Global Standards for expropriation and compensation; access to binding international arbitration and judicial enforcement of arbitral decisions; adequate institutional and judicial protection of property rights. How can we attract FDI for Internal Markets? Use the first investment promotion reality: “Foreign investors are unlikely to invest in a country whose own citizens won’t invest there.” Therefore we need to use available loans and equity investments to start or strengthen companies that serve the local market and establish a track record that could be verified by foreign investors. How can we attract FDI for our Regional and International Markets? Use the following rule seen above: “Once investing abroad, an investor that can more efficiently and cheaply sell into other country markets from a given host country than producing in those other country markets, will invest in the host country.” Therefore we need to use available loans and equity investments to start or invest in companies that serve regional markets and sell more efficiently and cheaply than their regional competitors, and in the process establish a track record that could be verified by foreign investors. Ends