Illusions of the foreign investor

Moses Khisa

What you need to know:

Govt has remained glued to chasing the elusive foreign investor, but cannot see something as basic yet crushing as the high cost of credit...

The recent controversial coffee deal yet again highlighted a long standing obsession of Museveni and his government with the magical foreign investor.  There are very good reasons to seek and secure foreign investment, especially for a poor country with a small economy struggling to leap forward.

A true investor, through a properly established company not a shadowy individual, potentially brings three crucial resources to an economy: capital (money), technology and specialised skills. All three are necessary for productivity, for moving from raw materials to any form of product and service, whether semi-processed or finished. In contemporary times, it is the multinational corporation that is the primary agent of foreign investment and the transfer of those three resources (capital, technology and skills).

The transfer tends to be from rich countries that have huge pools of investment capital and are vastly endowed with technology, both of these being utterly limited in poor countries.

A clear piece of evidence for foreign investment is when a foreign-based company, say a footwear manufacturer, sets up a processing and production plant in Soroti District. What factors go into investment decision-making for, say a German company, to set up a footwear manufacturing plant in Soroti? There are many, to be sure, but three or four are critical.

Market viability or local purchasing power is often an issue, but let’s assume production is primarily for export to foreign markets. A key consideration is the availability of sufficient and quality raw materials and the supply of fairly skilled labour. Both the raw materials and labour have to be cheap – easy exploitation.

Related is the quality of infrastructure and particularly the cost of energy – electricity being the most critical. Companies have an eye on the profit bottomline, so they want to incur as limited production costs as possible.

The other critical, in fact most important, consideration is non-economic; it is political – that is, the stability and security environment in a country. When multinational corporations make investment decisions, they factor in the cost of investment – how much they need to put in to get out finished goods – but they equally take into consideration the cost of disinvestment.  The long-term prospects of a planned investment have a bearing on where and when to invest. All other economic factors equal, it is difficult for a serious investor to put their money in a country where change of government is uncertain and the possibility of political instability is high, which would likely cause the company to withdraw prematurely.

There has been a great deal of scientific research on this subject and the evidence is readily available. But Museveni and his government keep chasing shadows and believing their own warped logic in pursuit of the ever-elusive foreign investor. In fact, as a share of GDP, foreign investment to Uganda has continually declined over the years!

No serious investor needs free land to invest. In the broader scheme of things, land is the cheapest of factors of production, the least worry for especially a big business. Better, no serious investor needs the government-guaranteed loan. To do this defeats the very essence of investment.

If a company has no capital of its own or cannot secure its own investment financing, then it is not worth an investor to savour. What is more, granting tax waivers and holidays is important for businesses that are keen on limiting costs of production, but it is not the most important consideration that goes into investment decision-making.

Seen from the long-term view, chasing after the foreign investor is actually not a prudent development strategy for a poor country. Giving sweeteners to attract investors may work sometimes, but it generally tends to fail. You get lousy investors or in fact totally fake ones, which has really been the story of the Museveni’s record on this issue.

The long-term strategy for Uganda is to grow and deepen a healthy and harmonious economic and political environment, which merits attracting investment. This means it is the citizens, Ugandans and their government, who have the long-term stake in the country and economy as to be the real investors willing to take the investment risk. It is them who can make the economy and country attractive to outsiders. There must be a deliberate strategy of building a local business and industrial class, investing in local enterprise and training a pool of skilled labour for value-added production.

The heavy-lifting to move a country from social backwardness and economic deprivation cannot be done by foreigners, it must necessarily be the business of locals and their businesses plus the political leadership.

The Uganda government has remained glued on chasing the elusive foreign investor, but cannot see something as basic yet crushing as the high cost of credit, a huge hindrance to local business success and value-added production.

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