Wednesday,September 30,2020 05:46 AM

FDI and the importance of the river

By Paul Busharizi

Added 1st February 2019 02:35 PM

If your stock of FDI is rising consistently, there is something right you must be doing.

FDI and the importance of the river

If your stock of FDI is rising consistently, there is something right you must be doing.


I happened to land upon some interesting figures recently, tracking the growth in foreign direct investment (FDI) in Uganda from 1990, put out by the UN Conference on Trade and Development (UNCTAD). The figures showed that FDI in Uganda had grown to $11.2b in 2016 from a miserly $6m in 1990.

This figure is not only a measure of new FDI inflows, but the existing FDI in the country starting in 1990. The devil is in the detail of course, but it is not difficult to conclude that the more FDI that existed the more that flowed in the country.

So while there was a six fold leap in the figures between 1992 and 1993, the net result was an additional $54m in FDI. Compare this with the six percent increase in value of FDI between 2015 and 2016, which in nominal terms comes to $625m jump.

The point is to attract more and more FDI you have to have foreign investment to begin with. It reminds me of the story of the man who walked into the Mercedes car dealership, then on Dewinton Road, on a Friday evening and asked to be shown a car.

The salesman was not too keen to help being a Friday afternoon. But also because this man did not seem good for the money, with his trousers fastened half way up his torso, flowery shirt and imitation snake skin shoes.

The "prospect" insisted on being given the full tour, never mind the salesman's reluctant body language. After the tour of several of their pricier models had been completed, the "prospect" seem to settle on one well after closing time. "Kankomewo," (Let me come back) was the last the salesman heard as he shut the door behind the "prospect".

Next morning when the first people came to open the show room they were greeted by the sight of the previous day's "prospect" and a friend. All dressed in flowery shirts, trousers belted above their budding potbellies and the imitation snakeskin shoes.

But in addition each had a suitcase in tow that was full of cash to buy the car.

"When I got home I told my friend and he too decided he needed a car like that one," the man from the previous day said pointing at their car of choice. Foreign investors kind of act the same. If one likes a country he tends to go back and spread the word.

So if your stock of FDI is rising consistently like Uganda has over the last quarter of century, there is something right you must be doing.

Investors local or otherwise, are looking for security of person and property, a consistent policy environment and the ability to access their returns, when and if they need them. The first two conditions allow them to project their company prospects in to the future and the last ensures they will get the investor and financier partners.

It is counterintuitive but just like an individual who wants to banks with an establishment that has ATMs, so too investors, they are more likely to invest in a country where they can repatriate their profits easily.

The fact that they are foreign investors, meaning they do not live or not incorporated in the country, meaning paying their dividends will necessitate expropriating their profits. Those who think this should not be allowed argue that they are taking all their profits out, monies which can not only be reinvested here for the benefit of Ugandans, but also depreciates the exchange rate.

This last point is interesting and betrays who the complainers are.

If you are a country aimed at promoting exports, an orderly depreciation of the shilling should be a good thing. So it can't be the exporters complaining. As for repatriating "all" the profits that is not legal, practical or desirable for a going concern. Upwards of 30% of all profits are paid to URA and regulators, easily half or more of that is reinvested in the business.

And so it might turn out that less than half the profits are repatriated depending on the development stage of the business.

Besides, anyone who has been in any serious business knows that the owner is paid last, if the enterprise is to carry on. But this whole discussion, which has captured headlines sporadically over the last three decades, points to the larger issue of the capacity of our own entrepreneurs and what it actually takes to attract FDI to this country.

Just because we have shown some success in attracting FDI to our shores shouldn't make us complacent. If you take the total stock of FDI in the country, the aforementioned $11.2b is not even a percent of the $1.93trillion in total FDI inflows in 2017 alone.

Despite the relative insignificance of our number versus the global picture, we have done very well for a poor country with little effective demand. All the more reason we should not take FDI for granted. It is like they say, "The importance of the river was not known until it dried up."

And by the way the two friends with suitcases full of money left disappointed that, while they had paid for the cars in full, they could not drive them out of the showroom immediately.







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