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Harness Foreign Direct Investment for wealth and job creation

By Robert Mukiza

Added 3rd August 2020 07:27 PM

The country benefits much more from these investors through the creation of jobs for our young people and the transfer of technology.

Harness Foreign Direct Investment for wealth and job creation

Robert Mukiza

The country benefits much more from these investors through the creation of jobs for our young people and the transfer of technology.

BUSINESS

Recently, President Museveni urged Government agencies to recognise that whereas, initially, some investors may not contribute to the tax envelope, they ultimately contribute to wealth and job creation.

This fact is confirmed by a recent study by the International Growth Centre which found that Foreign Direct Investment can help create higher productivity jobs through skills and technology transfers; catalyzing industrialization and increasing firm level capabilities.

Having established the importance of attracting Foreign Direct Investment, I would like to remind my readers that globalization has led to increased mobility of global firms and eliminated barriers to global capital flows.

This phenomenon explains the popular saying that "capital is shy"-meaning that investors move their money in different markets, in order to maximize their returns. Therefore, capital is scarce and countries have to compete to attract it. 

To make countries attractive for investors, Governments use many strategies, including: liberalizing the business environment for establishing and running investment projects, providing investors with guarantees for the repatriation of profits, improving the commercial dispute mechanism and establishing generous tax incentives, among others.

On all the above fronts, Uganda has done a great job.

On the issue of improving the business environment, the Government through the Competitiveness and Investment Strategy Secretariat of the Ministry of Finance, Planning and Economic development has worked tirelessly to improve the country's ranking on the World Bank's ease of doing business index.

Indeed, Uganda's ranking on the World Bank's Ease of Doing Business Report which measures aspects of business regulation affecting firms in an economy, improved by 11 points in 2019.

It is this conducive environment that allows investors in Uganda to repatriate 100% of their profits, without any form of restriction, save for the payment of domestic taxes.

On the issue of tax incentives, there is no doubt that Uganda's offering is generous and broad. It includes: capital allowances, VAT deferments, deductions and exemptions, loss carry forwards and tax holidays.

However, some Government Agencies look at investors as an easy target for domestic resource mobilization. They therefore unfairly burden them with tax and licensing obligations that make it less possible for them to take off and compete favorably.

As the President rightly observed, the country benefits much more from these investors through the creation of jobs for our young people and the transfer of technology.

In any case, there comes a point at which these businesses start contributing their fair share to the national cake. It is this broad view of the value of Foreign Direct Investment that all of us, particularly, the policy implementers, ought to appreciate.

Similarly, many Civil Society Organizations have preoccupied themselves with advocating for the elimination of tax incentives for investors. They wrongly argue, that tax incentives have not delivered what they were supposed to and have instead cost the country, billions of Ugandan shillings.

In a recent study titled, "Costs of Tax Incentives to Uganda's Socio-Economic Landscape", these CSOs argued that over the past eight years, Uganda has foregone revenue of about 7.6 trillion through this preferential treatment.  

As I have already indicated above, I do not agree with this position. It narrowly focuses on the domestic revenue collection benefits of Foreign Direct Investment and ignores the wider socio-economic benefits it brings to this country, especially in terms of job creation.

Most importantly, it ignores the fact that tax incentives play a greater role in investment decision making, in recent years, explaining the increasing generosity of tax incentives, worldwide.

Some may wonder how Foreign Direct Investment leads to job creation. My answer is straightforward. Investors create jobs through improving and expanding existing industries, commencing production in new industries, establishing linkages with domestic firms and fundamentally altering the comparative advantage of the host country.

Moreover, available evidence from China suggests that employment creation by foreign owned firms is higher than their domestic counterparts.

Based on the above, I agree with the President that Foreign Direct Investment in Uganda is a key driver for job creation through access to global markets, capital formulation, export promotion and spill-over effects on domestic firms.

Therefore, Government should adopt a singular policy towards Foreign Direct Investment, by continuing to offer generous tax incentives, among others, that can enable them to thrive and contribute to the national resource envelope.

Robert Mukiza: @Robert_Mukiza

The Writer is an international investment expert

 


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