Monday , June 17 2024
Home / COLUMNISTS / Andrew Mwenda / Africa and the myths of FDI

Africa and the myths of FDI


THE LAST WORD: By Andrew M. Mwenda

Why foreign direct investment is overrated and why Africa needs to cultivate local businesses

There is a fad in Africa. It is called Foreign Direct Investment (FDI). Across our vast continent, foreign investors are the most treasured visitors. Practically every country is obsessed with attracting them, often ignoring local investors. An African president will readily give audience to foreign investors where local investors take months or years to see him. FDI easily negotiates generous tax exemptions, government subsidies, etc. which local investors rarely get. And it gets other generous terms such as the right to 100% ownership of the enterprise and 100% profit repatriation.

But what exactly does FDI bring into the country that gives it such a cult-like status? The high priests of development tell us that poor countries have very low incomes, which leads to low savings that cannot be sufficient to finance their investment needs. FDI also brings technology, technical, organisational and management skills, etc., which enhance a nation’s productivity. It also creates more jobs and enhances the nation’s tax base. Who can challenge these claims? There is a lot of evidence to prove them.

However, if FDI is such an indispensable driver of development, then it should have developed many countries. Does anyone know of any country that developed mainly because of FDI? The United Kingdom industrialised largely through investments made by its nationals. So did America and the rest of Western Europe. Japan industrialised with national industrial giants like Toyota, Honda, Nissan, Sonny, Panasonic, Mitsubishi, Toshiba, etc. South Korea did so with Hyundai, Daewoo, Sam Sung, LG, Kia, etc.

Practically every country in the world that has transformed from poverty to riches has done so through the growth and expansion of its national companies. National capital is still the main driver of investment in China, the nation that has been growing as if on steroids. In 2002, FDI contributed only 10.13% of total investment. By 2005, 67% of total manufacturing output in China was from State Owned Enterprises (SOEs). More so, 80% of FDI was by ethnic Chinese from Singapore, Taiwan, Hong Kong, USA and Western Europe. Chinese, not FDI, are the ones developing China.

Here is the challenge facing Africa. The architecture of ideas (the ideology of free market capitalism) that is promoted as good for our development is not interest-neutral. International capital wants to be free to move wherever it wishes to make money. For it to make the best of itself, it must have the freedom and ease of entry and exit into and out of countries alongside the aforementioned generous concessions. Yet these concessions eat away long term benefits to host countries which are poor.

However, the high priests of development and the recipients of this gospel miss the obvious. The richest countries possess vast amounts of capital that need to find new areas where they can get higher returns. So they argue for free capital movements, for open, transparent and competitive international bidding. They call for privatisation and liberalisation. These ideas have been fed into our minds over and over again. Now they have acquired the status of gospel truths. Yet these ideas are not interest-neutral. They are interest-laden.

For example, a poor country privatising and liberalising through international competitive bidding will have multinational firms take over the commanding heights of the economy. What unique skills and technology has Stanbic Bank, which bought Uganda Commercial Bank, brought into Uganda that we cannot find at Centenary Bank? But the value Stanbic captured almost for a song by taking over UCB was very big. This year it will make up to Shs200 billion in profits, largely through trading in government securities instead of lending. Most of the profits will go to their shareholders abroad.

Standard Chartered Bank has been in Uganda for over 100 years making profits. But it does not own even a kiosk, and rents its headquarters from someone else. Whatever one can say of Sudhir Ruperalia, all profits from Crane Bank are plowed back into the economy, creating a huge multiplier effect. In 20 years of its existence, witness the number of branches across many towns and other investments Sudhir has made in the country from his dividends.

So we are made to open up in those areas where rich nations have a competitive advantage – capital. Yet rich countries have tight restrictions on something where poor nations have a competitive advantage – labour. Through stringent immigration controls, they have blocked cheap labour from poor countries to freely move to rich nations. Thus the wages for workers in rich industrial nations are kept artificially high through barriers to entry into their labour markets imposed on workers from poor countries.

In fact, rich countries have established a system through which highly skilled labour from poor countries is given easy access to their labour markets. So they can get what they lack (the best few out of poor countries i.e. brain drain) and block the many who would outcompete their own less-skilled workers at home. These decisions have not been made by a free market but by politics. Yet they tell poor nations that it is wrong to use politics to protect one’s domestic market from the cold winds of international competition.

Over the years I have grown wary of many of the ideas I had internalised about the challenges of poor countries. We need FDI. But I do not think it deserves the attention and concessions we give it. In 2014, Glencore, a Swiss company, exported $5.4 billion worth of copper out of Zambia but paid only $50m in taxes. Through profit repatriation and transfer pricing, multinationals take foreign exchange out of host nations. In the long term, poor countries face severe balance of payment problems. And in the long term, FDI either stifles the emergence of or even kills existing local firms.

The economic bureaucracies i.e. ministries of finance and the central banks in Africa are run by people schooled by the IMF and World Bank. The ideas they espouse benefit international capital and discourage the role of the state in cultivating local capital. Even local civil society and punditry are also hostile to aggressive state involvement to harness local capital. This is because of the belief that such state intervention should be politically blind.

The only transformative state is an activist state. However, there is no government that can pick winners without exercising cronyism. If Africa cannot build a transformative state, it is because inside and outside government, those who seek foreign control of the commanding heights of our economies have won the battle of ideas.





  1. Andrew, the problem is not “the high priests of development and the recipients of this gospel,” but the powerful connivance for particular and oft selfish ends between government bureaucracies and the providers of FDI. The global political economy favors those with political clout and, as such, I thought you would fault the political architecture as opposed to innocent development or economic theorists and citizens in poor countries that you call high priests, whose views remain insignificant, anyway.

    As a local investor, I am sure you sufficiently share the agony of our local investors who continue to lament with no government attention at how they have often attracted low deal from the Uganda Investment Authority compared to foreigners who only come to invest borrowed capital. In the end it is not how well you articulate the problem, but how governments of poor countries are willing, for once, to make the economic playing field favorable to their own citizens.

  2. This is a nice piece with reality embroiled in it. I can only talk about Uganda which is what i know My President is always singing the song of praise [the gospel you talk about] like a T.D Jakes of sort in a tithe sermon, about the gift of foreign investors coming to Uganda. Do you think he is aware of the issues you raise? and if not why?

    The bottom line is some people in Africa [the leadership] benefit personally from FDI than they would from local investors period!!!

  3. 1.FDI is the way to go. Ugandans have learnt alot from foreign owned investments e.g supermarkets like Game,shoprite have led to the growth of local super markets like;Quality ,Kenjoy,Capital Shoppers etc where else would they have learnt from? the same applies to the banking sector.
    2.Ugandans gain alot of social capital from FDIs e.g that when the CEO of MTN or Barclays,Stanbic deceided to blackmail uganda how much can we lose?and if they marketed Ug how much would we gain?When someone of status recommends product x or y to you you will definately try it out.
    3.Most FDIs caters for the elite & middle class Ugandans perhaps thats why their impact is not being felt by the poor.Banks 1st carry out feasibility studies before opening up branches. Crane Bank went on a spree of opening up branches countrywide see the fix they r in now?why do you think Swiss & HSBC Banks have few branches in African countries?
    4.Economists seem not to understand the economy they tell us that during deflation,the prices of goods come down isn’t that good for citizens?If the interest rates are lowered what would happen to the economy?They just want to keep busy with regulating the market justs for the sake of it.I have really enjoyed investing in Treasury Bills since 2003
    5.Adhola r u ok? what is happening to the American Politics?USA is going to have a play boy for a president Trump is Hugh Hefner’s good friend.Ted Cruz & Bernie Sanders were better candidates.Sarah Palin is even better than Trump.
    6.Women r always encouraged to listen to what men say never know they will say something nice to our ears . This time we listened to opposition so Uganda Airlines will soon resume its flight hope we SHALL have our routes back.Nayee i foresee a war coz Rwandans will want to travel with Air Rwanda,Kenya with their KQ and Ethiopians with their own airline.
    7.That toy plane parked at Kololo airstrip(of all places) is really embarassing the govt even kids dont know its use couldn’t they park it at Kyankwazi?you mean even Otafire & Ofwono can advise the govt to remove it?
    8.Price of building materials are too high e.g cement is 30k,Iron Bars(Hytensile) Y16 is 53K from roofings yet the companies that manufacture these products are exempted from paying taxes like withholding tax,govt subsidies their power costs so who is fooling who in this economy?They claim that they import raw materials from abroad & pay for them in dollars but we have all the raw materials for cement in ug there is cooper in kilembe for steel production.

    • Oh my —: Steel from Kilembe copper?
      I guess we are not meant to take this contribution too seriously. It is perhaps meant to relax our brains from more intense activity.

      Cheers, sister.

      Eng Kant Ateenyi

      • 1.@Kant dont we have iron ore in Ug?the crux of the matter is that we have raw materials that can be used in the construction industry but the prices of these materials r always high.
        2. Isn’t cooper used in steel production to increase corrosion resistance?
        3.You seem not happy with me coz you u think the world iron bars(hytensile) should be mentioned by Engineers only.
        4. Did you know that the ribbed iron bar (Euro steel) replaced the twisted iron bar( British steel) in construction?


        • Sister Winnie,

          I am never ‘unhappy’ with your contributions – including this one. As I should have implied, I find most of them ‘life-softening’ and therefore, they help me relax! Is that not nice of you?
          Enjoy your Sunday.

          Eng Kant Ateenyi

  4. Another hypocrisy is agriculture subsidies, yet this is where African would have an advantage. They cherry pick areas where there should be freedom.

  5. “These decisions have not been made by a free market but by politics.”
    You make a balanced argument in terms of our predicament yet leave it incomplete (perhaps purposefully) in terms of how the politics have failed us at home.

    The politics at home is driven by a mindset steeped in Nugu (jealousy) on account of promoting the business interests of only those aligned to a particular political lineage. That can be the only reason for failing businesses whenever their leaders seem to shift political allegiance. From burning Kasubi Tombs when they had just been declared a World Heritage Site, to Greenland Bank in the prologue to the Late Dr Kiggundu’s political flirtations, to National Bank of Commerce in the run-up to the 2016 elections, to burning schools and markets, and now the uncertain future of Crane Bank – merely weeks after rising the nation’s tempo against bailouts, can only inconclusively point to business interests strictly aligned to either a regime or its competitors, and their growth and survival too based on either the actions of the regime or its competitors.

    The politics is thus not conducive to home grown business in Uganda, yet, it is the driving agenda of politics in the nations that appoint the priests of commerce that have you unravelled. There would be no need to for these foreign investors to receive better statutory guidance and privilege from the state if a) they are not fronts for the political rulers to invest unaccounted for funds, or b) they pose no threat to regime in terms of funding detractors. I am yet to understand the linkage of Dr Besigye being a client of Crane Bank and the woes that ‘indigenous Bank’ is undergoing. Twice in the heat of a political moment; first immediately after elections, and second after his return from diaspora, Dr Kb has been covered in the press banking with Crane Bank. It is thus his preferred bank and potentially a conduit for funds for anti-regime actions. While it may have begun as a banking face of the regime, it is hard to imagine that Dr KB would be banking in a bank attributed to belong to his nemesis, or that such a Bank would be failing in an economy rumoured to be secretly dishing out bailouts.

    To better place this in perspective, the State Department of the U.S and Foreign Ministries of Western Nations, exist by statutory instruments in those nations to promote the business interests of their nations. It cannot be up to them to determine a level playing field for our interests. This conversation can only bear fruit if we turn the gist of your analysis into pressure on the state to reconsider the role of indigenous business in the economy. You could highlight the existence of this capital and how it can be harnessed for development. Recent statistics of Mobile Money point to over Ugx 18tn transferred among the over 15m mobile money subscribers countrywide across all networks. What is the capacity of the state to tap into this local capital in terms of aggressive crowd funding and business registration aimed at listing on the stock exchange to benefit from shares to raise capital. Would that not be the essence of lobbying for tax exemptions and statutory help in grooming start-ups? As an established Media and national personality, i believe you can do more to drive this conversation to its desired end! Lets respectfully spare the lamentations for the activists…

    • @Kiggundu r insinuating that govt burnt Kasubi Tombs?Buganda Kingdom is to blame they were guarding these tombs using local herbs and traditional healers. Most of these guards(whom the Kingdom vetted and found suitable were smoking pipes perhaps they did not understand the African adage that says don’t laugh when your friend’s house is on fire(its purely an African adage coz there r no grass thatched houses in Europe)they should have known better how to control the fire since their guards smoked local pipes .
      3.Its the same NRM govt with its great mgt that make the Tombs be gazetted as a UNESCO heritage site so why would it burn it down?
      4.Some Ugandans have been suspicious of Crane Bank its coz the owner opened it after the famous lottery known as scratch for cash. with human beings when the little voice in you tells you not to do something(thats the voice of God never ignore it)
      5.Managing business is not easy you may adopt a strategy that may bring down the business e.g which clients were Crane Bank targeting in districts like Soroti,Gulu,Iganga,Kisoro,Kabale if it was a hustle getting clients in Kampala,Mukono,Wakiso & Jinja how about in such areas?

      • @Winnie, applying partisan lenses to analysis can only lead to the kind of conclusion you arrived at. I clearly submitted that business interests in this regressive political climate are strictly aligned either to the regime or its competitors, and that their success and survival are similarly dependent on either the actions of the regime or its competitors. Only a guilt conscious could lead you to the conclusion that i insinuated that the NRM burnt down the Kasubi Tombs.

        Your argument on the culpability of the Kingdom, hinged on guards smoking pipes – an activity they have engaged in for centuries, without having burnt them down at any other point in time – is shallow to say the least. Unfortunately Winnie, when both the regime and its ardent competitors are all former guerillas cut from the same cloth and thus falling back on similar patterns in power struggle, it would be naive to put it past the actions of either the regime or its competitors in not just the Kasubi Tombs, but in other instances of arson to schools, markets and commercial buildings, or the closure of Banks like Greenland Bank and the National Bank of Commerce.

        Tip, when the author of a piece, like the one we are both responding to, sets out to present a balanced submission devoid of partisan overtones, it would be advisable that we all respond in a similarly constructive manner. Your first response for example concerning the benefits of FDI was presented with basic benchmarks for balancing the conversation. similarly, my submission was intended to counter balance the poltics and you may have noticed that i began the submission from the author that pointed to the crux of politics in the market decisions. That politics in our context includes the actions of the regime and its competitors in the ongoing power struggle!

Leave a Reply

Your email address will not be published. Required fields are marked *