Africa Foreign Investor Survey 2005 - unido

1. Introduction
Little empirical study exists that attempts to estimate
developing countries’ gains from capital flows.
Whether openness to capital leads to growth through
higher investment or merely increases vulnerability to
economic turbulence, leading to slow growth, is contested.The
Latin American debt crises of the 1980s, the
Mexican and Asian crises of the 1990s and many other
banking and currency crises have caused recessions and
years of lost growth. Unlike trade in goods and services
where the benefits to participants can be estimated and
total welfare increases, capital flows have potentially
severe downsides.
According to one review of literature (Dobson and
Hufbauer, 2001) the gains of developing countries from
access to global capital markets may be similar to that
from access to trade in goods and services. The important
distinctions made however are that different kinds of
capital (loans, portfolio investments and FDI) may have
different effects and financial integration requires certain
conditions be met before its benefits can be reaped.
In recent years, the composition of private capital flows
to developing countries has shifted significantly, with
increased and more accelerated inflows of FDI compared
to other capital flows. Flows of short-term debt
amounted to $30 billion in 1980, shrank to $15 billion in
1990 and turned negative from 1998 onwards; over the
same period FDI has grown from $5 billion in 1980 to
$24 billion in 1990 and $160 billion in 2000 (Crook,
2003).
On the one hand, this trend reflects the experiences of
past financial crises and the corresponding concerns
about the volatility of financial markets. FDI is comparatively
safe and not so easy to withdraw in difficult times.
The growing interest of developing countries in attracting
FDI is also recognition of its multiple impacts and
spill-over effects. In the short run, most FDI requires
only basic skills at the receiving end and brings in capital,
management skills, market links and technology.
For many developing countries, FDI is the most direct
way to start industrialization and enter international markets.
However, if the host country does not provide minimum
requisites that inspire interest and confidence to
the business communities, foreign investors may simply
not come.
Patterns of FDI flows
Although international investment flows have been
steadily increasing over time, they are asymmetrically distributed
between the industrialized and developing countries,
in favour of the former, and among developing
countries themselves. A few developing countries get the
lion’s share of FDI inflows.
According to Dunning, four main motives can be identified
that are prompting firms to undertake FDI (Dunning,
1993):
•
Market seeking FDI – driven by location factors and the
relevant dynamics and size of the market;
•
Natural-resource seeking FDI – driven by the availability
of natural resources;
•
Efficiency-seeking FDI – driven by the search for efficiency
through cost-saving and maintenance of competitiveness;
•
Asset-seeking FDI – driven by the enlargement of the
existing assets through JVs or acquisition in order to sustain
a competitive position.
Other categories or sub-categories can be added to the
above, such as (Aaron, 1999): labour-intensive FDI;
capital-intensive FDI; FDI with high local manufacturing
value-added; “Zone” FDI; service sector FDI; infrastructure
FDI; mergers and acquisitions; joint ventures;
wholly-owned subsidiaries, etc.
According to Dunning’s eclectic paradigm (Dunning
1977, 2000), a firm will undertake FDI if it can benefit
simultaneously from ownership, location and internalization
advantages.
1 | Introduction
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