The Danger Of Desperation Is That It Attracts Foreign Direct Investors With Wrong Motives and Ulterior Motives

 

Clemence  Mupfunya

 

This week I make my debut on the Sunday Express with an assessment of the economic environment for attracting foreign direct investment in emerging economics for the Southern African Development Community (SADC region).

After so many years of African countries having gained independence most of them are finding it difficult to gain financial stability and operate far below their potential full employment.

Hence most African economies got an unemployment rate that is higher in the whole world.

This crisis has also been enlarged by governments focusing on the demand-side policies and giving too little attention to the supply-side policies.

Therefore, in order for the governments to solve unemployment and financial crises most countries have to consider foreign direct investment as the private capital inflow of choice.

Foreign direct investment creates more jobs in the local economy by directly establishing new jobs and indirectly when local spending increases due to purchases of goods and services by the new increase in per capita income in the economy.

 

 

Foreign direct investment also can be a fuel to economic development in the host country by reducing inequality gaps by bringing new infrastructure development in remote areas of the host country.

It also directly boosts technological advancement in developing countries since they are financially strong they can bring advanced equipment that is needed for fast-moving technological changes.

In order for this emerging economy to reduce local market failures and also government failures, there is a need for them to attract capital inflow through foreign direct investment.

Foreign direct investment reflexes capital invested in a country that provides manufacturing and service capabilities for both native consumers and world markets.

Not only does this capital signal investor confidence in a specific sector and in the geopolitical climate of the host country but it can also link national economies benefiting both the capital supplies and the host region.

Hence, this article assesses factors that can attract foreign direct investment into the SADC region if implemented effectively.

Capital Availability investment is mainly dependent on the available investment capital that may be put into circulation.

 

 

Multinational companies and individual investors look to emerging economies for investment opportunities.

Since in the SADC region the majority of economically active people are unemployed it results in a higher marginal propensity to consume due to the heavy dependence of the unemployed by those who are employed.

The marginal propensity to consume was estimated to be 0.7 in South Africa and thus leaving the marginal propensity to save close to zero at 0.3.

In countries like Zimbabwe, there is a need to bring back the confidence of people in the financial sector so that the economic agents can have faith in the banking industry.

Government policies or regulatory environment. National policies can be a double-edged sword, especially those that favor state entities at the expense of privately owned firms.

Due to liberation some of the policies implemented by those in positions of authority are too political whether than economic.

For SADC countries to be able to attract the effective foreign direct investment they must come up with transparent, non-discriminatory, and predictable policies.

It is important for policymakers to use policy rules rather than discretionary policies for monetary and fiscal policies because policy rules yield better results than discretionary policies.

Stability: political and economic stability can facilitate an influx of foreign direct investment. Acts of instability such as human rights abuse, rioting, rebellion and social unrest are barriers to business and can cause supply shortages which will result in hyperinflation which renders a local currency virtually obsolete.

The region had in more than a decade faced political instability with other political parties and the general public.

Strong political policies should be implemented, and these should complement economic policies that straighten the local currency.

 

 

Solving political instability allows the government to generate more funds to provide public goods and increase central bank reserves by selling government bonds to international markets.

Local SADC markets and business climate; the sheer size of SADC’s population makes it an attractive region for investors to commit capital to higher-end industries like healthcare, information technology, energy and engineering, and luxury goods and services.

Economic growth and foreign direct investment can start a positive relationship, in essence, the more Foreign direct investment a region can attract, the more it grows which stimulates further FDI and create sustainable regional growth.

As the region got economies that are most unequal in terms of the share of the national cake, inequality is a fundamental problem needed to be solved for the region to achieve social welfare.

Openness to international trade: Foreign direct investment tends to find its way to nations that can sell goods to both local and foreign consumers.

Trade barriers such as tariffs discourage investors, who realize that artificially inflated prices will depress demand abroad. Export-friendly policies like regional and international free trade agreements encourage FDI.

In conclusion, as much as international capital flows are necessary for sustainable economic growth and development the governments should not be desperate for foreign direct investment to invest in their local economies.

The danger of desperation results in adverse selection, meaning it attracts foreign direct investors that have wrong motives for investment in the host country, hence resulting in inflation and higher unemployment in the long run.

More assessments in the coming editions. Cheers.

 

Economist Clemence Mupfunya is a correspondent for The Sunday Express. He writes in his personal capacity. Contact him at (27) 67 208 2236.

 

 

 

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