Foreign Direct Investment in Developing Countries - Research Paper Example

?Running head: Foreign Direct Investment in Sudan Agriculture Foreign Direct Investment in Sudan Agriculture Insert Insert Insert Instructor’s Name 24 March 2011 Foreign Direct Investment in Sudan Agriculture Introduction Foreign direct investment involves an international company incorporated in a country undertaking to invest in productive assets in an increasingly globalized economy of a foreign country. The business incorporated in the country of origin is referred to as Parent Company whereas that in foreign country, it is a foreign affiliate. Foreign direct investment by the parent enterprise comprises ten percent or more ordinary shares of the foreign affiliate and therefore exercises substantial control over the affiliate business. However, in subsidiaries, more than 50% of the voting rights must be controlled by the parent company. Foreign direct investment in which the parent enterprise cannot exercise control over the affiliate enterprise is basically termed as a portfolio investment (Organization for Economic Co-operation and Development, 2009, pg 17). Moreover, FSI stimulates economic growth in host countries of the affiliate companies. Host countries therefore undertake to attract foreign investors by introducing tax breaks, specific grants and incentives, investment regulation relaxation and enforcing low interest rates on loans to foreign investors. Foreign Direct Investment in Developing countries, Africa and Sudan Foreign direct investment has in the past few years grown considerably, particularly in developing countries’ agricultural sector. Foreign investors view developing countries to have exceptional potential of economic growth. Primarily, multinational companies have significantly increased foreign investments in developing countries because of the competitive advantage in their investments. Currently, foreign direct investment in developing countries constitutes sixty one percent of total foreign investments. Moreover, international investors engage in stiff competition and business rivalry with other foreign investors in developing countries agricultural sector. Agricultural foreign investment in African countries has a great impact on economic and social situations more than other sectors due to reliance of African countries on agriculture. In a move to promote foreign investment in agricultural sector, African governments have undertaken structural adjustment and liberalization of policies to sourcing and marketing inputs and outputs of agriculture both locally and internationally. The governments have also introduced export-processing zones in targeting foreign investors in the agricultural sector (Basu, et al, 2002, pg 12). FDI and Development: Review of the literature Forms of International Investment in Developing Countries International investors may enter foreign markets through trade, foreign direct investment, or international licensing of technology and intellectual property such as copyrights and patents. Each of the above forms is characterized by different levels of involvement, managerial requirements, and commitment in a foreign market (Schaffer, Agusti, and Earle, 2008, pg 6). Trade in foreign markets usually has the least political and legal risks due to its limited involvement in the foreign economy especially in the case where a transnational corporation is maintaining sales agents over seas. Trade is used by investors to import items not readily available in the country and export items that are in plenty or not needed. In addition, foreign governments may regulate trade by enacting laws, policies, and import duties. Licensing of technology and intellectual property are substantial assets with legal rights to artistic or written works, name and government grants owned by domestic and international firms. Lastly, foreign direct investment refers to ownership and active control of productive assets by an investor in a foreign country with the expectation of making profits both in the short run and in the long run. Land and environmental Issues in foreign investment Transnational corporations have continually developed interest in focusing on agricultural production investment although governments have also been involved in this investment. In developing countries, private investors and governments have invested in agricultural land acquisition strategies for food production. This has become a major part of investment in developing countries with respect to goals of achieving food security to humanity. Foreign direct investments in agriculture are driven by economic and food security concerns in developing countries. However, the government should focus on self-sufficiency and not dependence on foreign investments to exploit commercial agribusiness opportunities in the country. Moreover, African countries should seek to lead the country towards achieving food autonomy. However, developing countries regulate foreign direct investment in as much as it attracts, to curb adverse social and environmental effects that may be caused to the host country. Land acquisition has become a major issue of concern as it has led to large-scale and long-term displacement of original farmers from their land due to insecurity of land tenure. Foreign investors have leased large tracks of land by luring farmers and landowners into leasing out their precious land. In addition, agribusiness firms have expanded and leased land in large scale although the land sometimes may stay idle and unoccupied. Foreigners have taken advantage of small farmers in land acquisition, which has led to increased land prices and development of mafia-like structures. The government has the responsibility of making sure foreign direct investment is coherent with the broader national policy and domestic regulations. Benefits and costs of foreign direct investment Foreign direct investment in agriculture contributes to higher economic growth in developing countries, which has the benefit of alleviating poverty. Primarily, foreign direct investment in developing countries triggers technology spillovers, human capital formation and international trade integration, which helps to initiate competition in the agribusiness environment. In addition to economic benefits, foreign direct investment helps to improve social and environmental conditions in developing countries. Transnational Corporation may help local firms and governments in the developing countries to adopt technologies and corporate policies of international standards. Despites the massive benefits of the host country from foreign direct investment, there are costs associated such as deterioration of the balance of payments because of repatriation of profits by foreign companies. Secondly, the multinational corporations do not have positive co-existence with communities in host countries. Thirdly, developing host countries may become over dependent on internationally operating enterprises thus leading to loss political sovereignty in extreme cases. Moreover, the developing country may fail to take advantage of technology transfer and know-how from the foreign investing companies. Foreign direct investment in Sudan History and statistics Oil and gas production exportation have been Sudan’s major economic stimulants and propagating factors that saw Sudan’s Gross Domestic Product growth rate rise to 10 per cent per annum. International Monetary Fund has been of great assistance to Sudan in implementing economic reform by managing Sudan’s Currency Exchange Rate float to facilitate economic growth. Sudanese government introduced the new pound currency at an initial Currency Exchange Rate. In January 2007, the state introduced a new currency, the Sudanese Pound, at an initial Currency Exchange Rate of 2 Sudanese Pounds per US$. Agricultural productions in Sudan contributes a third of its total Gross Domestic Product and provides employment opportunities for almost 80 per cent of Sudan’s labour force. At some point, the Sudanese government is said to have discouraged foreign investors in investing in her agricultural sector through conflicts, disruption and civil war. Conflicts and related disruptions in developing African countries such as Sudan have jeopardized foreign investment in agriculture and other sectors. In this case, drastic reduction in private and foreign investment have caused considerable drop in agricultural production thus resulting in widespread hunger and starvation. Consequently, casualties of resultant widespread hunger are been proved to be in high numbers (Ukaga and Afoaku, 2005, pg 201). Colonial government in Sudan before independence had spearheaded its development efforts on agriculture by means of irrigation due to its dry land nature. The colonial government realized investment had focused mainly on ad hoc undertakings such as cotton gins and oilseed-pressing industries alongside irrigation in agriculture. Sudan had also developed mechanized farming that was reinforced during the World War II. After the world war, plans were developed to facilitate the widening and growth of the country's economy in a move to prepare Sudan for independence, although the plans were adversely hampered by a lack of experienced professionals and adequate resources. However, private investors had developed irrigated agriculture with development of small manufacturing operations and three larger industries namely: meat, cement plants, and breweries. African countries have not given agricultural sector the priority it deserves, particularly in terms of attracting foreign investors. In addition, developing countries have not reached the investment target necessary to grow the agricultural sector at an adequate rate although foreign investment in agricultural sector is negligible compared to world’s total foreign investment. There have been shortcomings of African countries political stability and government policies to attract foreign investments particularly in the agricultural sector. This has resulted in African countries such as Sudan to increasingly become unattractive to foreign investors and donor community who have suffered ‘donor fatigue’ due to multiple donor failures. Statistics has it that Net foreign direct investment in Africa dropped drastically from 1.2 billion dollars in 1982 to 498 million dollars in 1987 (Ayittey, 1999, pg 11). Social and political factors such as poverty, inter-ethnic conflicts, corruption, and civil wars have adversely affected investment in agricultural sector. Sudan’s huge economic potential growth has been grossly affected by prolonged civil war in the south and lack of basic infrastructure and facilities. Moreover, Sudan’s huge population and economy is dependent on subsistence Agriculture and fisheries, which have seen most of her citizens living below the poverty line for a long period despite tremendous increase in average per capita income. Endowments and land tenure systems Foreign direct investors in the Agricultural sector of Sudan need to put into consideration issues revolving around Land ownership, acquisition and conflict resolution procedures. In Sudan, laws and tenure systems on Land issues are governed by customary law, sharia law, tribal customs and English common law. Each of these laws enact differing rules, practices and regulations within the national boundaries of Sudan although in the south, there is more emphasis and value placed on customary law while in the North part of Sudan, sharia and common law are significantly dominant. Sudan’s livelihood and situations generally prevail in combination of traditions and customs despite the fact that they may sometimes be in line with regulations that are formal (Un-habitat, 2010, pg 75). Foreign direct investors in the agricultural sector have put critical consideration in acquiring land. They however need to abide by host government policies, legal, and institutional framework that minimizes risks and capitalizes on benefits from foreign investments on leasing land and related natural resources. This is in a move to safeguard citizens from permanent loss of rights to their ancestral land and to enable attraction of technically competent investors who will generate substantial economic benefits in accordance with the host country longer-term development strategy. The policies seek to encourage collective sharing of benefits with local land investors who may be unable to negotiate with the foreign investors. Host governments have to put in place investment framework for investors to adhere to social and environmental requirements. Policies and framework are put in place to facilitate recognition of land rights, technical and economic viability, and minimum requirements of environmental sustainability and to promote voluntary land transfers and open accessibly to relevant information. For productivity of investments in the Agricultural sector, existence of land rights and security of tenure must prevail to its major impact on farmers. With critical consideration of these factors particularly security of tenure, farmers respond positively to development incentives with significant willingness to focus on improvement of agricultural land (Vyas and Casley, 1988, pg 18). Land rights recognition enables investors to benefit from security of tenure by ensuring that local land owners and users benefit from long term investments by foreign investors. Voluntary transfers from impartial and informed agreements with local land owners at a fair level of proceeds should be in line with technical and economic viability. Information on prices, contracts, rights, and land use plans need to be made available to public. In addition, parties should be fully aware and able to selectively enter into agreements with public agencies that represent them efficiently. Moreover, host governments must ensure land acquisitions are environmentally and socially sustainable to agricultural expansion. Developing countries in Africa have in a long period reported slower gross domestic product (GDP) growth relative to other developing regions. This slow growth rate has been attributed to restrictive conditions on aid, trade and foreign direct investment. However, inadequate production and management systems have also contributed to poor economic management and social political instability, which has discouraged foreign investment. To promote economic development, African countries need to upgrade their technology and develop democratic and tolerant systems with regards to fostering sound economics management (United Nations. Economic Commission for Africa, 2002, pg31) Sudan's agricultural and industrial productivity had begun to decrease before the upsurge of limiting factors such as conflicts and spontaneous civil war. Development projects couldn’t be completed on time, and those that were completed on time did not meet the projected production standards and levels. Sudan’s economy began experiencing a downfall with respect to rapid reduction in production while her debts continuously accumulated due to her inability to repay the huge amount of money borrowed. Foreign direct investment has alternatively been promoted by African governments by privatizing government institutions, directing government resources towards activities that maintain rural roads and irrigation facilities. In addition, the developing countries have liberalized their markets to create a favorable environment for investors (Beye, et al, 2002, pg 11). The general downfall of Sudan’s economy was particularly as a result of limited planning on single projects that heavily impacted on the whole economy. Their fragile infrastructure was easily thrown off balance by the failure of huge projects that influenced the direction in which the economy would take. However, the government sought to negotiate loans from other foreign sources other the World Bank, in which it had huge accumulated unpaid dept. The government also removed its restrictions and controls on currency to stimulate thousands of Sudanese workers in the Persian Gulf to repatriate their earnings. Instead of investing the repatriated funds on long term development projects, the funds were invested in non economic stimulating activities such as consumer goods and housing. Current Issues and Controversies in Sudan Sudan’s current economic problems revolve around the Darfur conflict where thousand of peacekeepers have continuously been deployed by the African Union, with the assistance of Rwandan and Nigerian Military. The peacekeepers have always been sustained by funds raised from the donor's conference in Addis Ababa, although there have been strong criticisms that the peacekeeping missions were largely ineffective as they lacked efficient personnel and expertise. In response to this evident ineffectiveness, the United States Congress raised US$173 million to fund the African Union mission in Sudan although the UN later own merged its efforts with African Union to deploy new forces. The mission came to halt when the African Union refused to cooperate with the International Criminal Court in enforcing the international arrest warrant issued against Omar al-Bashir (Sudan's leader) over War crimes. Irrespective of efforts by investors, development partners and African governments to promote and develop agriculture, the sector massively remains dependent on weather and traditional agriculture methods dominated by illiterate and poor workforce. Recent agricultural policies in Sudan have placed too much emphasis on market forces and fail to consider critical issues such as technology, civil conflicts and instability over land and pasture (United Nations. Economic Commission for Africa, 2002, pg34) Conclusion Foreign direct investors have repeatedly analyzed Sudan’s stability situation in order to make informed decisions on the viability of investing in the Agricultural Sector. The country is significantly characterized by war between the government and rebel leaders in the conflict between the South and North. This has been the result of rapid reduction of foreign investors, particularly in the Agricultural sector which could have been of great help to the citizens in ensuring food security. There have been considerable efforts for peace agreements between the Government of Sudan and the rebel Sudan People’s Liberation Movement in a move to attract investors and achieve political stability and economic growth. Sudan has also experienced another civil war that started in 1983, although analysts claim that it cannot interrupt development that is being planned for, now that the North and South peacefully co-exist after the referendum. The analysis bases its claim on a harmful inside ‘government’ process of development which is being accelerated under the cover of war by key political constituencies in Sudan (Keen, D. Lee, V, 2007, pg 509). In combination with all the above political shortcomings, structural problems in the agricultural sector remain extremely significant thus the need for Sudan to embrace helpful policy interventions and technological transformation in the Agricultural sector. References Ayittey, G. N. (1999). Africa in chaos. NY: Palgrave Macmillan. Basu, A., et al. (2002). Foreign direct investment in Africa some case studies, Issues 2002-2061. NY: International Monetary Fund. Beye, G. et al. (2002). Impact of foreign assistance on institutional development on national agricultural research systems in sub Saharan Africa. Rome: Food & Agriculture Org. Keen, D. and Lee, V. (2007). Conflict, trade and the medium-term future of food security in Sudan. Disasters, Vol. 31, p9-24, 16p. Retrieved March 24, 2011, from http://web.ebscohost.com/ehost/detail?vid=4&hid=25&sid=7b993ea9-99344399b39ca2e607339b08%40sessionmgr11&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=a9h&AN=24219650. 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