Investment Protection and Promotion in the ACP-EU Context

Rundheersing Bheenick

Issues Paper prepared for the Summit of ACP Heads of State and Government

Libreville, Gabon, 6-7 November 1997

Contents

• Introduction: FDI in the ACP and the Lomé Convention
• A Prospective Look: Some Scenarios

Introduction: FDI in the ACP and the Lomé Convention

The 1994 World Investment Report data show that FDI flows to the African ACP member countries averaged US$ 1,099 million over the years 1982-1987. They fluctuated between US$ 1,466 million in 1988 and US$ 1,691 million in 1992, reaching a peak of US$ 3,406 million in 1989. There was a high degree of concentration in both the countries and the sectors attracting these flows. Between 1982-1987 for example, more than 60% of FDI went to the five oil-producing countries of Angola, Cameroon, Gabon, Congo and Nigeria. This pattern continued in the subsequent period. The data show that for the years 1988 to 1992, these five countries accounted for respectively 43.6% (US$ 639 million), 61.3% (US$ 2,088 million), 46.2% (US$ 676 million), 36.1% (US$ 736 million) and 54.1% (US$ 915 million) of the total FDI to African ACP countries.

Table I. Breakdown of ACP FDI by region

Source: UNCTAD, 1994 World Investment Report, United Nations. Total FDI flows to non-oil producing African ACP countries were a mere trickle, averaging US$ 429 million, over the years 1982-1987. They picked up a little in the subsequent period, but at a slower rate than the average for all developing countries combined. They averaged just under US$ 1,000 million during 1988-1992, ranging from a low of US$ 776 million in 1992 to US$ 1,318 million in 1989. FDI flows see-sawed from year to year without any clear pattern emerging.

For the African ACP countries as a whole, FDI flows increased from an average of US$ 1,099 million over the years 1982-1987 to an average of US$ 2,009 million over the years 1988 -1992, an increase of about 90%. This compares unfavourably with the increase for the developing countries as a whole. Within the ACP group itself, although the African countries still attracted most FDI going to the ACP, they experienced a significant drop in their relative share, from 82% to 74%, over the periods for which data are presented.

The African ACP are simultaneously contributing to, and suffering from, the negative perception of Africa in non-resource FDI. The entire continent is marginalised. As pointed out in the World Investment Report, New Zealand alone absorbed as much FDI as the whole of Sub-Saharan Africa in 1994 with an inflow of US$ 1.8 billion. North Africa did not fare any better with total inflows of US$ 1.3 billion, equivalent to the FDI flows to a small European country like Portugal.

From an average of US$ 114 million over the years 1982 - 1987, FDI flows to the Caribbean member countries of the ACP gradually rose to US$ 435 million in 1992. The average for the period 1988-1992 was about US$ 384 million, a three-fold increase when compared to the average for the years 1982-1987. The ACP countries in the Caribbean have clearly been more successful in attracting FDI. Although the volume of FDI flows to the Caribbean is tiny by world standards, it is significant that the Caribbean ACP have outperformed not only their other ACP partners but also the developing countries as a whole.

The preceding analysis clearly shows that the Carribean and the Pacific ACP countries have achieved some success in attracting FDI. The Pacific ACP have done at least as well as developing countries generally while the Caribbean ACP have outperformed the developing country average. The African ACP countries have been the least successful in this area, although in volume terms the flows to Africa are more important than FDI inflows into the Pacific ACP. The uniformity of treatment given under the various Lomé provisions has thus led to a significant differentiation in the results achieved.

This is happening in an international context where the pressures of globalisation allied with the internationalisation of corporate strategies have led to the stock of FDI growing at a faster rate than world exports and world output. Concurrently, FDI flows into the developing countries have emerged as "the largest and fastest growing single component of external finance for this group of countries, taken together." Also, by its very nature, FDI provides a package of integrated inputs - including capital, technology, skilled human resources and managerial talent, market access, and usually participation in a world-wide marketing and production chain - which can support the development process more effectively. All these considerations argue strongly in favour of FDI figuring prominently on the agenda for the post-Lomé discussions at par with trading arrangements in goods and services.

There is a whole range of factors, both endogenous and exogenous, that have hampered FDI inflows into the ACP countries. It should be pointed out that most of the discussion in this paper is concerned with investment in non-extractive industries, since other considerations generally predominate in extractive industries such as oil, mining, and lumber which are location-specific. Topmost among the endogenous factors are political stability and an enabling environment. Political instability and civil strife scare away investors, both domestic and foreign. Without an enabling environment, private initiative and economic enterprise will be limited and will deter FDI.

Economic geography, size and locational factors have a major bearing on foreign investment. Many ACP countries are severely handicapped by their remoteness from major markets and world economic growth poles. The relative economic stagnation of many ACP countries, arising often from the fall in world demand for their exports of primary products, as well as poor transport and communication links have compounded the difficulty. Technological changes in manufacturing and distribution such as shorter lead times, flexible manufacturing and "just-in-time" techniques of sourcing and inventory management have accentuated the geographical handicap facing most of the ACP group, with the possible exception of the Caribbean which is favourably placed for the North American market. Eastern Europe, with its proximity to the EU market and access to larger domestic markets than most ACP countries can provide, has been able to capitalise on these trends and has clearly diverted FDI flows away from other countries, including the ACP.

There is a host of other contributory factors, many of which are inextricably linked with, and indeed define, underdevelopment. These include the low level of domestic income of most ACP countries, dilapidated economic and social infrastructure, poor work ethics, the shortage of trained labour, the relative lack of a business culture, undeveloped financial and capital markets, and the absence of a business- and investor-friendly environment. It is noteworthy that the Carribean and Pacific countries which have not known major conflicts have been more successful in attracting FDI than African ACP countries, some of which like Angola, Mozambique, Rwanda, Burundi and the Democratic Republic of Congo(formerly Zaire), have been through periods of civil wars. Periods of unrest not only discourage FDI in the country concerned, they also cause damage to social and economic infrastructure and delay much-needed economic reforms which are often prerequisites for FDI. They also have a ripple effect on neighbouring countries and the picture of a war-torn continent lingers on long after the end of the actual conflict. Far from encouraging FDI, they actually encourage capital flight. They change the risk-return calculation and investors need much more convincing before putting in their money in a region riven by civil strife. It cannot be a coincidence that the return on, for example, American investments in Africa are higher compared to US investments in Latin America and the Caribbean, not to mention US investments in the developed economies.

Mauritius has been able to attract foreign investment into both its export-manufacturing sector and into tourism. As regards manufacturing, the FDI flows have mostly originated from the Far East and to a lesser extent, from the EU. There has also been some FDI in the tourist industry, initially from South Africa and later from the EU and the Far East. Although Mauritius has done very well by ACP standards, care must be taken not to oversell the Mauritian "success story" for FDI inflows into Mauritius are fairly low in comparison with the massive flows into the Asian countries. Further, the flows into Mauritius are predominantly in textiles and garments and are actually declining at a time when world FDI flows are increasing. Another successful country is the Dominican Republic, which, like Mauritius, has been able to attract export-oriented FDI, mainly from the US.

Political and economic stability have been key success factors and their absence could not have been compensated by any of the other equally important factors which enter into the FDI equation, as detailed previously. In both cases, the investments have been in notoriously footloose industries such as textiles and garments where investors have sought out countries like Mauritius and the Dominican Republic to enjoy the double-benefit of a low-cost offshore manufacturing platform while maintaining or, as in the case of Far Eastern investors, enhancing access to protected markets like the EU and the US.

Both foreign and local investors want to ensure that they get a reasonable return on their investments. They will only invest if the business environment is secure and predictable enough to allow them to reap the benefits over time. Tax and investment incentives cannot on their own outweigh political risks and risks of capital expropriation. A local investor community and a well-established class of entrepreneurs used to operating on a level playing field, and not addicted to rent-seeking, can serve as a magnet to foreign investors. The positive experience of the pioneering investors rapidly snowballs as their competitors and suppliers try to emulate them and follow them to the host country. Although export manufacturing and tourism are rarely viewed as complementary industries, the Mauritian example shows that there are synergies on the FDI front as the example of contented investors in one sector has encouraged investment in the other.

Resource endowments are not a prerequisite for attracting FDI as the case of both Mauritius and the Dominican Republic demonstrate. Examples from other countries like Hong Kong and Singapore provide ample proof that countries with no natural resources can still attract considerable flows of FDI. And outdo better-endowed countries. Anecdotal evidence suggests that some resource-rich country officials are wary of FDI because their country is going to be exploited by foreigners!

The availability of a cheap, literate and easily trainable labour force is an important consideration during the initial stage of industrial development when manufacturing operations are likely to be concentrated at the low end of the market. An industrial culture and good work ethics are a distinct advantage. After the initial learning period is over and the wage level starts to go up, labour intensity gradually gives way to skill-intensity and it is the quality and level of skills that will attract further FDI flows into higher-value added products. Simultaneously, the industrial structure undergoes a gradual transformation from the low end to the middle end of the market.

Infrastructure facilities like telecommunication, regular power and water supplies, reliable air and sea connections, developed banking facilities, well-located industrial sites and efficient internal transport facilities are important prerequisites. These must not only be available but they must also be competitive in price and quality or they can more than offset the labour cost advantage that may have been the driving force behind the FDI decision in the first place.

The regulatory framework in Mauritius is modern and transparent. An investor knows what incentives and facilities he will be entitled to if he goes into export-oriented production. This allows forward planning, an important consideration for the foreign investor who after all is operating away from home, with all the difficulties of adaptation this poses. Laws are enforceable and there is no discrimination against foreigners.

Another important aspect is very basic and concerns the level of safety prevailing in a host country. If a country is perceived to be a safe place, this inspires confidence in the eyes of the foreign investor. In addition, those in charge of buying such as purchasing managers and merchandisers are more likely to fly to a safe country for placing orders, which is an additional inducement for a foreign investor. In Mauritius, for example, during the Gulf war the export-processing factories benefited from orders initially meant for North African competitors which were cancelled as these countries were too near the war zone. In addition, tourist arrivals into Mauritius increased at the expense of other competing destinations perceived as being too dangerous. Personal security is a primary consideration as its absence severely limits the range of investments to those yielding sufficiently higher returns to offset the higher risks and the bigger outlays on personal security. Hong Kong and Singapore, star performers in the FDI league, also figure among the safest places on earth.

If FDI is to have any lasting effect, a very crucial success factor is that local business people have a tradition of entrepreneurship and risk-taking. Indeed, the foreign investor often needs a partner or a manager who is familiar with the local scene and the business culture and who may assist in case of trouble. The juxtaposition of foreign capital, manufacturing know-how and marketing savvy with a local entrepreneurial class on the lookout for new opportunities can be a seedbed for joint ventures. These are important to ensure that FDI is locked in and leads to an actual transfer of know-how in terms of production and marketing skills, knowledge about raw material sourcing and so forth.

Articles 26 to 39 of Lomé I dealt with industrial cooperation in general while the creation of the Centre for Industrial Development (CDI) was provided for under Article 36. Lomé II directed a little more attention to the subject and the clauses dealing with industrial cooperation are contained in Articles 65-82. Under Lomé III, industrial development is covered in Articles 60-74 and investment promotion, which had already become the focus of attention in its own right, is dealt with separately in Articles 240-247. Lomé IV and Lomé IV bis take this concern much further and devote Articles 258 to 272 to different aspects of investment, including investment protection (Articles 260-262), financing of investment (Articles 263-266), and support to investment (Articles 267-272).

Table II. Relevant Provisions of Lomé Conventions

In spite of these provisions and the increasing concern with investment and private initiative in the more recent Conventions, FDI flows to the ACP have unfortunately lagged behind, and in the case of the African ACP far behind, flows to the developing countries generally. It can be hypothesised that the situation would probably have been worse without these mechanisms, but that is cold comfort. Lomé has exerted a positive impact in creating a more hospitable environment for private initiative and good governance. The entire Lomé mechanism is, however, essentially driven by bureaucrats, at both ends, and its pro-business stance could be considerably improved.

The 1995 Annual Report of the CDI shows that the nature of the projects to which it is providing assistance involves less and less FDI of EU origin. In fact, only 6 projects were approved for joint venture partnerships in 1995! This reflects both the lack of interest of EU investors in investing in ACP countries and the unfavourable conditions for EU FDI prevailing in most ACP countries. It is worth pointing out, however, that even if the CDI’s activities have not been successful in stimulating an increased flow of EU FDI, related EDF support for activities such as financial assistance for trade fair participation, industrial partnership meetings and investment promotion, have had a positive impact on exports. This has in many cases generated local investment for the creation of new enterprises or the expansion of existing ones and has impacted positively on growth, employment generation and foreign exchange earnings.

In addition to the overly bureaucratic approach, which overlays ACP bureaucracy with the EDF eurocracy and compounds the inefficiencies and inertia of both, another major weakness of EU support for private sector development and FDI is the fragmented nature of the support provided. There is a plethora of agencies involved in the various stages of an investment decision, stretching from initial project identification to implementation, including financing of investment. These include the EDF, the CDI, the EIB and agencies in both home and host countries such as export credit and development finance institutions. Investors are not a very hardy breed and some streamlining may be called for to make the going easier.

The experience of ECIP shows clearly the merit of an integrated approach. All the various facilities available to support investment, ranging from grants for initial studies and exploratory discussions to term credit for investment, are delivered at a single point in the participating countries. This one-stop shop is normally a commercial bank and in other cases it is a Development Finance Institution. They are more in tune with the requirements of business than remote and faceless bureaucrats. The overly fragmented approach towards FDI facilitation in Lomé is a major handicap and a move in the direction of a more integrated package of services will no doubt improve take-up of the financial facilities and increase EU flows of FDI to the ACP countries.

The discussion of the major bottlenecks hindering FDI flows to the ACP and a cursory examination of the few success stories suggest some possible lines of approach to attract greater investor interest. These can be summarised as follows:

• maintain a high level of political stability, allied with good governance;
• reinforce the rule of law and modernise the legislative framework;
• develop and maintain macroeconomic stability;
• maintain a climate of policy predictability without any arbitrary changes;
• increase efficiency in financial and capital markets;
• ensure that labour and wage legislation support the major economic policy thrusts;
• adopt human resource development approaches that will rapidly produce the type and level of skills required to complement the capital resources from FDI;
• take a liberal approach to work permits for foreign nationals;
• ensure a fast track approval process for foreign investors;
• introduce measures and incentives to compensate for any locational handicaps or to capitalise on locational advantages;
• develop and maintain an open, transparent and supportive trade and exchange regime;
• reduce administrative red tape and increase bureaucratic efficiency;
• develop and maintain a supportive investment regime;
• maintain a market-friendly business environment;
• negotiate a network of bilateral investor protection and double taxation agreements with potential FDI originating countries;
• enter into multilateral investment protection and guarantee agreements;
• promote the image of the host country as a safe, modern, business-like and investor-friendly place in all appropriate fora;
• at the EU level, harmonise and integrate the various FDI support facilities and adopt a one-stop shop approach.

The above is not mutually exclusive in so far as some of the broader categories, such as governance, can be deemed to subsume some of the other requirements which have been specified individually in the interest of clarity.

The experience of successful high-performing Asian economies also brings out clearly that there are cluster effects and externalities arising from having successful neighbours. When these neighbours join in regional groupings, the well-known "flying geese" pattern of growth and development sets in to the benefit of all the partners, including other neighbouring countries which are not directly involved in regional cooperation schemes. This underlines the need to reinforce regional cooperation to enhance the attraction potential of many ACP countries, especially those suffering acutely from the consequences of the small size, the relative remoteness, and the insular or land-locked character of their economies. It also has implications at the geo-political level for regional peace-keeping and political fire-fighting.

A Prospective Look: Some Scenarios

FDI outflows are essentially driven by major firms, in particular trans-national corporations (TNC’s) from the capital-exporting countries. Some developing country firms also figure among the originators of FDI. Five countries dominate in the league of FDI home countries, of which three are EU members, namely the United Kingdom, France and Germany. The United States is the leading home country, accounting for 23% of the total FDI outflows of US$ 222 billion in 1994 and for a full quarter of outstanding FDI stock. Japan is the fifth country and accounted for 9% of these outflows.

FDI of EU origin has increased at a slower pace than US FDI. It stagnated over the past decade both in terms of absolute value at around US$ 62 billion and as a share of the world total (around 33%). It has picked up slowly in 1994, especially from France and Germany. Table III presents the relevant data. The relative stagnation is partly due to the combined impact of the ongoing industrial restructuring and single market programme which has stimulated substantial investment activity within the EU itself, thereby reducing FDI outflows from all EU countries. There is in parallel a qualitative change in EU FDI, with a greater proportion devoted to the tertiary sector. The percentage breakdown of the sectoral composition of outward EU FDI, presented in Table IV, brings out clearly the diminishing importance of the primary sector.

These trends indicate the increasing difficulty of attracting EU FDI to the ACP, arising from the twin facts that EU FDI is not growing as fast as US FDI and, perhaps much more important, that its changing nature means that EU investors are targeting their foreign investments more and more to the service sectors, where the ACP countries cannot offer attractive opportunities compared to other larger, more developed, or better-located countries. This growing mismatch between what EU investors are increasingly looking for and what ACP countries can offer represents a serious challenge to ACP efforts to attract EU FDI.

Table III. Outflows of FDI from EU countries, 1986-1994

	1986-90	1991	1992	1993	1994		1986-90	1991	1992	1993	1994
	$US billions						Share of world total (%)
France	17	24	31	21	23		10	12	18	11	11
Germany	16	22	16	17	21		9	12	9	9	10
UK	28	16	16	26	25		17	8	9	13	12
Total	61	62	63	64	68		36	32	36	33	33

Source: UNCTAD, 1994 World Investment Report, and 1995 World Investment Report, Overview, United Nations.

Table IV. Sectoral Composition of outward FDI stock of EU Countries

Source: UNCTAD,1994 World Investment Report, United Nations

The competition for FDI flows is very stiff and the poorest and most handicapped ACP country is already competing with the most developed country to attract FDI. The largest single FDI recipient is the United States and Western Europe is the region attracting the largest FDI inflows. They predominate in both sides of the FDI equation, as home and as host country simultaneously. The marginalisation of the ACP in FDI also has a structural dimension which needs to be flagged although it cannot be considered further in the limited scope of this paper. Investment promotion efforts by the ACP countries in the EU will have to take these changing trends into consideration. They further underline the need to adapt the existing instruments of cooperation and to develop new tools which can be more effective in this changing context.

The pressures of globalisation are making the ACP countries look increasingly less attractive as target countries for FDI. Indeed, due to the increasing competition resulting from the globalisation process, companies in many sectors of industrial activity have to be as close as possible to their markets. Corporate decision-makers are looking at overseas investment venues in terms of their potential domestic market and also as production bases from which to supply an entire region. These new parameters do not reflect the ACP in a favourable light. Given the low purchasing power of most of them and, with the exception of the Caribbean ACP countries, their distance from major markets, the ACP countries face a real danger of being increasingly marginalised as far as FDI decision-makers are concerned.

The gradual setting-up of a Free Trade Area (FTA) between the EU and the 27 Mediterranean countries will in all likelihood lead to a diversion of FDI from the EU from the ACP countries. The geographical proximity of Mediterranean countries cuts down on transport costs and facilitates close control over the investment. The new trends in manufacturing technology and distribution techniques discussed earlier place a premium on quick response to market signals. Faraway manufacturing bases are thus severely handicapped.

The example of Mediterranean basin countries like Tunisia and Morocco indicates that the risks of diversion are very real. Both have attracted considerable flows of FDI in the early 1990's. Indeed, Morocco, with FDI inflows of US$ 320 million in 1991 and US$ 424 million in 1992, was by far the biggest recipient of FDI among the non-oil producers in Africa. In sharp contrast to the Mauritian experience, FDI in these countries is growing and diversifying into new sectors of activity, such as data capture and desk top publishing and printing. A Moroccan company is reported to hold 25% of the market share for the printing of French novels! The creation of an FTA between the EU and the Mediterranean countries will give added impetus to outward FDI from the EU to this region at the expense of the ACP.

Eastern Europe represents another attractive location for EU FDI. There is no denying that it makes more sense for an EU investor to start a production base in a lower-cost neighbouring country like Hungary or Poland which has an industrial workforce of skilled and highly-trained labour, while also offering the attraction of a large domestic market. This will allow fast responses to rapidly changing market trends, and result in substantial saving on transport costs and cut down on delivery lead time.

The last factor is an important consideration and will become increasingly so in sectors like garment production where fashion and colour trends are changing so fast that fabric and colour specifications are only known at the last moment when particular items start to be sold at distribution outlets. This implies that production processes like dyeing can only be carried out as close as possible before market release. In addition, fast changing trends imply that chain stores keep low stocks to minimise the risk of having garments for which no customers can be found. Suppliers have to be as close as possible to the market to be able to meet repeat orders fast and at competitive transport costs.

Privatisation of erstwhile state-owned assets in Eastern Europe, as in Latin America, has given a boost to FDI from the EU as from other capital-exporting countries. In addition, if the proposed introduction of the European single currency goes ahead and its use spreads rapidly, the business community in Europe will avoid all currency risks arising from currency fluctuations as well as the transaction costs of exchanging currencies.

Again, this is a development that will adversely affect the ACP countries, including those that have achieved full currency convertibility, which would normally have been expected to enhance their competitiveness.

The implementation of the recently proposed aid package to finance infrastructure development projects in Eastern and Central Europe will attract additional EU FDI to this region. The sheer size of the Eastern European market for consumer goods represents an incentive for EU multinationals to set up production bases in this region. Finally, the eastward expansion of NATO will also bring the former Eastern bloc countries like Hungary, Poland and the Czech Republic closer to the EU. The spectacular economic growth of Asia, the size of its population, the regional integration and cooperation initiatives like ASEAN, APEC etc, and the sheer dynamism of the region exert a powerful attraction for EU investors. The Asia-Pacific region accounts for nearly three-quarters of total developing country FDI stock. The developments under way in China with its 1.2 billion inhabitants, the availability of a hard-working and cheap labour force and plentiful natural resources have transformed China into the second-largest FDI recipient in 1994 with inflows of US$ 34 billion. As the EU is under-invested in the Asia-Pacific region relative to other countries like the United States and Japan, there is a strong likelihood of that future EU FDI outflows will be diverted to this region.

There are very real risks for increased marginalisation of the poorer countries as far as FDI flows are concerned. The unpalatable truth is that most of them rarely figure in the investment plans of major FDI players. The OECD proposed Multilateral Agreement on Investment (MAI), may offer some prospect for poorer countries to position themselves on the world investment map. MAI includes clauses related to, among other things, profit repatriation and local content rules. Once signed and ratified, It can be expected to lead to increased FDI flows towards the signatory countries. In this context, it is worth pointing out that MAI will be open to accession by non-OECD countries. If it is generalised, it will substantially reduce, if not eliminate altogether, the need for the conclusion of bilateral investment treaties. There was reportedly a total of 1,160 such treaties in force as of June 1996. Their negotiation and conclusion are time-consuming and cumbersome. MAI, like other multilateral instruments and mechanisms such as ICSID and MIGA, may offer an avenue for the ACP to reduce risk perception in the minds of foreign investors.

Generalisation is difficult. It is certainly the case that the poorest ACP countries have by and large failed miserably to induce any significant FDI in non-resource-based sectors. South-east Asia, however, provides many examples of comparable countries which have managed to attract FDI flows. Cambodia, Myanmar and Laos have started to attract FDI, in particular from neighbouring countries of Hong Kong, Singapore and Thailand. Investors established in these countries are relocating their more labour-intensive operations off-shore. This trend is expected to accentuate when these three Asian LDC’s join ASEAN and participate in creating a regional free trade area. Vietnam, which is already a member of ASEAN , has been the recipient of FDI from its more developed neighbours for quite some time now. Thus, when other conditions are satisfactory, FDI from other countries in a region can serve as catalyst to spark off the process of industrialisation in the poorer LDC’s, probably much more so than direct FDI from distant countries. Policies to assist in regional integration efforts are thus of paramount importance to stimulate FDI in the poorer and smaller countries and to prevent their further marginalisation.

Some of the ACP countries are rich in resources which represent lucrative investment opportunities and they easily attract investors, if the other conditions are right. This paper is not concerned with resource-based FDI and focuses rather on the non-resource ACP countries. The great majority of these have an abundant supply of labour, which can be trained for productive operations of interest to foreign investors. The low growth rate of the ACP countries, their low per capita GDP, the small size of their domestic market, and their relative remoteness from major markets, are nonetheless severe constraints in attracting FDI.

These difficulties are often compounded by the lack of an enabling environment, poor infrastructure and inefficient internal financial and labour markets. Investors, who are looking for opportunities to tap local and regional markets from their chosen production base as part of their globalisation strategy, are not attracted by such characteristics. Structural adjustment, economic liberalisation and political empowerment, may be a sine qua non for a few ACP countries if they are serious about FDI.

In most cases, privatisation of state-run enterprises can attract FDI. There are many examples, most notably in Latin America, showing how well-planned privatisation in sectors like telecommunications and utilities have attracted major FDI flows, including investment from multinational enterprises. The conditions attached to the purchase of equity by foreign investors must be attractive and the political, economic, and legal framework must provide sufficient guarantees to inspire confidence. Accounting and financial reporting must match international standards. Among the ACP, there are examples of successful privatisation of enterprises in countries like Ghana and Ivory Coast.

For the years 1988-1992, total flows of privatisation-induced FDI to all developing countries amounted to US$ 8,673 million, representing nearly 5% of total FDI flows during this period. Sub-Saharan Africa, which is essentially made up of African ACP members, attracted only US$ 99 million during these five years, ie a meagre 1% of total flows. This is in sharp contrast to the experience of Latin America and the Caribbean which attracted US$ 8,119 million, ie 94% of the total privatisation-related FDI. The lion’s share went to non-ACP countries. Argentina received over US$ 4 billion, Mexico over US$ 1 billion, and Venezuela over US$ 1.5 billion. Comparison with such large and well-located countries is not entirely fair but the low level of privatisation activity in the African region is a contributory factor. Stepping up privatisation efforts may unleash some untapped FDI potential for the ACP countries.

Greater competition resulting from the break-up of monopolies as in the case of the power, telecommunications, financial and transportation sectors will generate efficiency gains which will add to the locational attractiveness of countries engaged in privatisation. Investments in infrastructure will also stimulate further FDI as conditions of operations are improved. Beyond that, by acting as a signaling device to foreign investors of the commitment of host-country governments to economic reform, privatisation programmes can induce additional FDI even after the completion of a particular programme.

Privatisation is likely to have a positive impact on private initiative and private sector development. Indeed, the increase in efficiency in sectors on which the manufacturing and service sectors depend for their own efficiency and growth like power and telecommunications will lower their costs of operation and make them more competitive. This will act as a stimulus for the private operators, both local and foreign, to engage in additional investment.

This section reviews briefly some of the main potential sources of FDI to the ACP, in addition to the EU which has already been discussed.

The United States is the single largest source of FDI. The increased interest shown by the US Government in Africa may channel more US investment into African ACP countries, provided that host country domestic conditions are favourable. Recent initiatives like the US-Africa Economic Forum, the Africa Equity Fund and the McDermott Bill will assist in stimulating increased FDI from the US. In addition, the US is considering the negotiation of Bilateral Investment Treaties (BIT) with African countries where there are significant opportunities for US investment to provide a secure environment for US investors in the host countries. Other instruments and activities designed to increase US FDI to Africa include the signing of Double Taxation Avoidance Treaties, as well as the increased involvement of such agencies as the US EXIM Bank, OPIC (the Overseas Private Investment Corporation), and USAID, which assisted in the setting up of institutions like the Ugandan Investment Authority. US companies are already investing in Mozambique, South Africa and Madagascar.

FDI from Japan has fallen from a peak of US$ 48 billion in 1990 to US$ 18 billion in 1994. The host countries for Japanese FDI have been in the Asia-Pacific, North America and Western Europe. Flows to the developing countries have fallen off with the diminishing preoccupation to secure access to key natural resources and the greater priority given to securing market access. Prospects for reversing this trend are slim.

As mentioned earlier, China is the second-largest recipient of FDI inflows after the United States and the largest FDI recipient in the developing world. It has also begun to play an increasing role in FDI outflows, rapidly becoming the leading source of FDI among the developing countries. It is involved in joint ventures in light manufacturing, electronics and textiles in both developed and developing countries, including several ACP countries. As liberalisation progresses further, Chinese FDI outflows can be expected to increase. There may be some prospects to attract additional flows to the developing world and some ACP countries could benefit from this.

The economic liberalisation policies pursued by the Indian Government has opened up new opportunities both for FDI into India and for outward FDI from Indian companies with global ambitions. In many African and Caribbean ACP countries, Indian companies have already invested in sectors like textiles, garments, and pharmaceuticals An Indian pharmaceuticals venture in Mauritius targets the regional COMESA market. The active role played by Indian private sector organisations like the Federation of Indian Chambers of Commerce and Industry in the overseas investment drive will lead to increase FDI from India to those ACP countries which have suitable host institutions. Discussions are reportedly under way between Mauritian and Indian private sector institutions to promote triangular ventures in the neighbouring countries.

South Korea, Malaysia, Thailand and Singapore are all actively promoting outward FDI as part of their economic strategy to benefit from globalisation. The "chaebols" of South Korea are major players on the FDI scene, courted by eager governments in host countries in Europe and America, playing a comparable role to the Japanese "zaibatsus" when Japanese firms first ventured overseas to Korea and South-east Asia. Malaysian companies are already active in Fiji, Mauritius and South Africa, especially in the housing and tourism sectors. High-powered delegations from this country have been prospecting for investment opportunities in the Southern African ACP countries. Other countries like Indonesia, which is actively investing in Special Economic Zones in China and India, could give some attention to Africa once the process of development is in full swing.

There are other countries which may play a significant role in a particular region or a particular sector of activity although the countries themselves are not perceived as a major FDI home country. The role played by Australian entrepreneurs in the media business in the United Kingdom illustrates this point. Notwithstanding globalisation, regional players may still have an advantage over distant countries in specific contexts. Australia and New Zealand are potential sources of increased FDI to the Pacific ACP. In Latin America, Chile and Mexico have outflows of FDI and part of these could be directed to the Caribbean ACP.

The New South Africa which, although not an ACP country, has sought closer association with both the EU and the ACP can conveniently be discussed here. South Africa has world-class companies which are major international players in their sector of activity. South African companies have traditionally had both direct and portfolio investment in many ACP countries in the region, especially those with which South Africa has been associated in regional groupings like SACU and SADC.

There are substantial South African investments, some packaged through Caribbean offshore tax havens, in the neighbouring countries of Mozambique, Mauritius, Namibia and Botswana, which are all members of SADC. Some of the newer investments are of a triangular type involving Mauritian and South African capital investment in, for example, Mozambique. South Africa will continue to be a major source of FDI in the South.

Mauritius has enjoyed a head-start on African ACP countries in such areas as offshore finance and export manufacturing. Mauritian companies have invested in Comoros, India, Madagascar, Mozambique, Seychelles and Zimbabwe mainly in the garments and tourism sectors. Prospection missions have been sent as far afield as China. Outward FDI from Mauritius is expected to go up as Mauritian export-oriented garment manufacturers and service providers face increasing wage pressure at home and relocate their more labour-intensive production operations in neighbouring countries from which they can continue to enjoy market access to their target markets. The gradual expansion of the network of bilateral Double Taxation Avoidance and Investment Protection Agreements will contribute to expand the geographical coverage of FDI to and from Mauritius.

The examples of Mauritius and South Africa cited above are by no means unique. There must be hundreds of examples of ACP investments in neighbouring ACP countries. Australia, New Zealand, and to a lesser extent Japan, play a similar role to South Africa in relation to the Pacific ACP countries. There may be some prospects for increasing these flows.

Regional integration initiatives involving the elimination of barriers to trade, such as the Southern African Customs Union (SACU) and the Common Market for Eastern and Southern Africa (COMESA), help overcome problems associated with the small size of domestic markets and enable enterprises achieve the necessary economies of scale to operate and service a wider market in the region. Such initiatives can catalyze the creation of the necessary infrastructure and facilities to serve the region. Regional integration efforts offer a pathway to overcome the vital constraint of economic size, and to a much lesser extent remoteness, which handicap many ACP countries.

The creation of regional entities stimulates a sense of belonging to a larger and more important economic community than that of the individual country and improves perception among investors. The more dynamic countries in the region can set the pace, thereby forcing the laggards to follow suit, so that there are usually policy improvement spin-offs resulting from regional approaches. Regular meetings between business people in a region assist in exploiting business opportunities and lead to FDI. Familiarity with the region is an asset for foreign business people who are looking for the proper gateway to serve regional markets. Initially, such third-country operations may take the form of re-export from regional warehousing and distribution centres. Eventually, it may lead to FDI.

Efforts at regional integration are already having a positive impact on intra-ACP FDI within the Southern African Development Community (SADC). The admission of a country member like South Africa has imparted a new dynamism to the grouping. South African companies, benefiting from the liberalisation of capital investment outflows in the last two budgets, have stepped up their investment forays in the region in terms of both FDI and portfolio investment. Mauritian companies have followed suit, although on a very much smaller scale.

The gradual reduction in customs tariffs on products originating from member countries along with payments and clearing arrangements have given a boost to intra-COMESA trade and investment. There is much overlapping membership with SADC and the remarks in the preceding section also apply. Mauritian enterprises are also capitalising on business opportunities by investing in such COMESA countries like Zimbabwe and Madagascar.

The formal setting up of the Indian Ocean Rim Association for Regional Cooperation, which at present comprises 14 members, may stimulate some FDI to the ACP participating countries, namely Kenya, Madagascar, Mauritius, Mozambique, and Tanzania. The other participants include such countries as Australia, India, Indonesia, Malaysia, Singapore, and South Africa which are heavily involved in FDI. There should be scope for triangular ventures in third countries, including non-member ACP states.

In the Caribbean, the 15 countries of the ACP will take an increasing part in the regional integration process under way. The proposed creation of a CARICOM common market and the recently formed Association of Caribbean States will give added impetus to the regionalisation process. The geographical proximity to the United States of these 15 ACP states already make countries like the Dominican Republic an ideal production base for export to the US market. In time, the gradual transformation of NAFTA into the Free Trade Area of the Americas (FTTA) will have a positive impact on FDI in this region of the world and the Caribbean ACP states stand to benefit, if only from the spill-over effects.

The post-Lomé IV negotiations will be conducted against a background that is markedly different from that prevailing at the time of the first Lomé accord. The various revisions that have been brought to the original convention have sought to modernise and update the arrangements. The biggest and most far-reaching change since the last revision has undoubtedly been the conclusion of the Uruguay Round and the establishment of the WTO. The gradual enforcement of the full WTO discipline in international trade and exchange will exert a determining influence on trade patterns and FDI flows.

There is a multitude of rules relating to foreign investment at the bilateral, regional and multilateral levels. The WTO, through the GATS, the TRIPS and the TRIM Agreements as well as the plurilateral Government Procurement Agreement, places important obligations on governments with respect to the treatment of foreign nationals within their territories. The more binding nature of these rules is what distinguishes the WTO investment-related regulations from those of other multilateral FDI instruments. Another distinguishing feature is the security of future market access provided for by WTO rules and disciplines. The WTO can thus play a leading role in facilitating the design of a comprehensive framework to ensure that investment and trade rules are compatible and mutually supportive. Indeed, as the leading FDI host and home countries, except China, are already members of the WTO, any WTO agreement on investment promotion will be adhered to by the leading players. The existence of WTO dispute settlement panels will ensure the resolution of conflicts that may arise over the interpretation of the proposed agreement.

In addition, the WTO can provide a forum for discussing the ways and means of bringing about a level playing field in the field of investment incentives. At present, incentives to attract FDI are very high in some of the most industrialised countries. Indeed, within some of these countries, different states and regions are engaged in a fierce competition to outdo each other in devising yet more innovative ways to attract FDI to their part of the country. These financial and other inducements cause distortions to occur in FDI flows in favour of the wealthy countries, who are in any case much better-placed than most ACP countries to attract FDI for a variety of other reasons considered elsewhere in this paper. The WTO can assist in eliminating these distortions by providing a set of uniform rules about investment incentives to which its members, rich and poor alike, will abide by to ensure the efficient use of incentives. Special dispensation clauses can then apply for the less well-off to offer additional incentives to offset the particular handicaps that weigh them down in their FDI promotion efforts.

The ACP Secretariat, with the collaboration of the ACP countries, can prepare the ground for the consideration of appropriate clauses relating to FDI in this agreement by making an inventory of existing FDI regulations in the ACP countries, evaluating their strengths and weaknesses and assessing their overall impact. This can provide useful pointers for the future and indicate the possible lines of attack in the negotiating strategy vis-a-vis the EU in the first instance, and subsequently together with the EU vis-a-vis the WTO.

If time and resource pressures do not allow such an exercise to be conducted for all the ACP countries, then a representative sample could be identified to serve as the basis for this assessment. As the issue of WTO-compatibity will arise for whatever agreement is reached, it is vital that the ACP negotiating position be firmly rooted in the actual experience of the ACP in this matter. The ACP could thus harmonise their position and speak with one voice on issues like investment incentives and press for the complete banning of exaggerated investment subsidy programmes and other financial incentives as part of a WTO agreement.

A Free Trade Area involving the ACP Group and an enlarged EU will certainly enhance opportunities for trade and hence investment. However, the extent of the impact on FDI in the ACP Group may be marginal being given the fact that with the enlargement eastward, foreign investors will find it more profitable to invest in the geographically closer countries of Central and Eastern Europe and North Africa as discussed before. Mediterranean countries like Tunisia and Morocco have attracted substantial investments from the EU in both the traditional industries like clothing and new sectors like data capture, desktop publishing and printing. The creation of an FTA between the EU and the Mediterranean countries will give added impetus to EU FDI to these North African countries at the expense of EU FDI to the ACP.

As regards non-EU FDI, for many sectors it makes more sense to service the enlarged EU from within the EU itself, as is done by some Japanese and Korean conglomerates in Wales, Scotland etc. US companies are stepping up investment activity in EU countries like Germany and Spain.

Existing arrangements have signally failed to direct any significant FDI to the ACP. In this kind of context, the maintenance of the status quo will accelerate the marginalisation of the ACP on the world investment map. FDI flows will continue to pass by and pour towards countries in the regional trading blocs, actual or prospective, which offer greater commercial opportunities such as EU, NAFTA, MERCOSUR, and AFTA. Foreign investors will be attracted by the enlarged market of these regional blocs which consist of large populations with rising purchasing power. The ACP Group will be at a disadvantage in its bid to attract the foreign investment, technology and know how on which its future economic growth will depend. In fact, status quo is likely to result in a gradual drying up of FDI, a prospect which will definitely worsen with any erosion of the current preferential Lomé trading arrangements in a follow-up convention.

Although some differentiation has been built into Lomé since the very first Convention, most notably in such measures as (i) special treatment for least developed, island, and landlocked countries, and (ii) separate measures for producers of different commodities and minerals, it is the uniformity of approach that is the main characteristic of Lomé. It is this uniformity that has cemented the ACP relationship and buttressed ACP solidarity. Differentiation carries the risk of unleashing centrifugal tendencies and provoking fragmentation.

It can be argued that a differentiated approach will only formalise what is already happening in the minds of those who take investment decisions. On this line of reasoning, the break-up of the ACP into different regional blocs will have a positive impact on FDI, either of EU or non-EU origin. This particularly applies to some of the constituent parts of the ACP which may be suffering from the negative image of much of the rest of the ACP. As discussed previously, the experience of the regional blocs such as ASEAN and NAFTA demonstrates that the drive towards regional integration stimulates intra-regional FDI as labour-intensive activities are relocated from the newly industrialising countries to the less developed members which have lower wages. The new climate of enterprise created may lead to other types of FDI, namely extra-regional FDI of the resource-seeking type, eg for petroleum exploration in Vietnam. These positive effects only occur in real regions, not amorphous groupings of distant countries.

The tax incentives offered by the United States for the use of export processing zones to process materials originating from the US has induced investments in border industries in Mexico in the electric and electronic component, automobiles and clothing industries. This "maquiladora" industry is also present in some Caribbean countries like the Dominican Republic and Jamaica.

It is worth noting that Japan, which does not belong to ASEAN but is the most developed country in the region, is the most important source of FDI in the region. Also of importance is the fact that Japan started the process of massive investment in the newly-industrialising countries of the region in the 1980's in its cost-cutting effort to cope with the negative effects of the appreciation of its currency. Of late, it has been investing in the second tier of industrialising countries like Malaysia, Thailand and Indonesia.

In the absence of broader and more far-reaching agreements at the multilateral level, regional investment protection agreements will certainly provide a more secure environment for FDI to take place, especially in countries which do not currently provide sufficient "comfort" to investors on their own but where the region itself is well-viewed. At the same time, such agreements can facilitate regional sourcing and subcontracting, thereby aiding regional integration. However, where investor perceptions are highly negative for an entire region, there is little that a regional agreement can do to shore up confidence sufficiently to attract any significant FDI. This is unfortunately the case with many African ACP countries. In such cases, it makes more sense to subscribe to an international agreement like the MAI or an eventual WTO agreement.

Economic reform aimed at the implementation of sound macroeconomic policies to achieve macoeconomic and policy stability will give a positive signal to foreign investors. A stable environment which fosters risk-taking and the development of entrepreneurship is a necessary pre-requisite for investment by both local and foreign investors to take place. Policies aimed at promoting economic growth to generate the necessary level of income, and hence consumer demand, are essential to create conditions conducive to FDI. A vibrant economy acts as a magnet for FDI as exemplified by the case of China, the single largest FDI host country among developing countries.

The success of the East Asian tigers is too well-known to need re-telling. The following table illustrates clearly the positive relationship between the rates of growth of FDI and of GDP.

		LDC’S	Africa	Latin America and the Caribbean	South, East and South-east Asia
	YEAR	PERCENTAGE GROWTH RATE
fdi inflows	1986-90	na	7.4	15.7	35.9
	1991	-52.7	18.3	73.6	4.9
	1992	-15.3	12.5	-2.6	36.5
GDP
	1986-90	2.1	2.5	2.0	7.1
	1991	0.6	1.6	3.3	6.1
	1992	0.4	0.4	2.5	7.8

The development of a strong local private sector is also a prerequisite for FDI. Indeed, foreign investors are always looking for locals either as partners or managers. After all, locals have an unequalled familiarity with the local context and they facilitate the integration of the foreign investors. A developed local private sector and investor community inspires confidence in the eyes of foreign investors, who will see this as evidence that Government is supportive of the business sector. In addition, a well-developed private sector ensures that there is an effective transfer of know-how about sourcing of raw materials, production technology, international marketing skills and other inputs necessary for the successful implementation and expansion of manufacturing and other projects. The case of Mauritius illustrates this point, which is especially important as quite a number of the early foreign investors were fly-by-night operators.

The level of skills of the labour force is an important determinant of FDI. Indeed, the emergence of countries like India and China with their large pool of cheap labour means that a low level of labour cost in an ACP member country does not confer the necessary competitive advantage to attract FDI. It is rather the presence of skilled labour which can add value that is important in the eyes of the foreign investors. With regard to FDI from the EU, its future enlargement to include the associated countries of Central and Eastern Europe will provide a pool of highly-skilled labour at competitive wages within a few hours’ drive or flight from the major capitals of the EU. This makes it all the more imperative that ACP countries invest in vocational training schemes, and labour market reforms where necessary, to ensure that they have a competitive workforce.

For most ACP countries, privatisation can be the most potent inducement for FDI. Although the EU has supported privatisation programmes under existing provisions, notably in Kenya and Uganda, it will make sense to provide for new Lomé tools designed explicitly to foster and support the privatisation process in ACP countries. These can usefully complement the provisions relating to economic reforms and private sector development. New instruments can include a Special Privatisation Fund, which will finance activities like the preparation and, where necessary, the restructuring of companies earmarked for privatisation. The preparation of marketing aids like prospectuses and road shows can also be financed from this fund.

The European Community Investment Partners (ECIP) Scheme, of later vintage than Lomé, has met with much more success in promoting EU FDI in the partner countries. While some of this has no doubt more to do with the nature, size, location, and character of the partner countries, it is nonetheless true that ECIP adopts a more business-friendly approach than the existing Lomé mechanisms.

"The ECIP financial instrument operates through a network of financial institutions established in the EU Member States and the 60 eligible countries. Its aim is to support sustainable economic investments, particularly by private operators in the developing countries of Asia, Latin America and the Mediterranean (and South Africa) through an increase in direct investment by EU and local companies. ECIP provides financial support for EU/local joint ventures and EU/local licensing agreements. It finances technical assistance and investment projects in all sectors of the economy which are developmentally-friendly"

Although ECIP is managed by the Commission, and is in this respect similar to ACP/EU cooperation instruments, its real strength derives from its market-driven nature. It is the network of participating banks and financial institutions in all the partner countries, which are closer to the business community than development aid administrators, that identify and propose projects to the Commission. ECIP is supplemented by such upstream instruments as MED-Invest and AL-Invest which extend business support and facilitation services, such as Business Cooperation Centres, BC-Net, and Europartenariat, to partner countries and facilitates contact between potential partners from the Mediterranean and Latin America with their EU counterparts before the ECIP mechanism takes over.

ECIP adopts a coordinated and integrated approach to stimulating investment and industrial cooperation. It comprises four facilities:

• Financing of costs associated with the identification of potential joint venture projects and partners, with grants of up to 50% of total costs or a maximum of ECU 100,000
• Financing of preliminary operations to launch a joint venture, with an interest-free advance of 50% of total costs or a maximum of ECU 250,000, which can later be converted into a grant, a loan, or equity
• Financing of capital requirements of up to 20% of the joint-venture capital, or a maximum of ECU 1 million, in the form of equity or an equity loan, subject to the condition that the participating financial institution also co-finances the project
• Financing of human resource development, including training and management assistance, in the form of an interest-free loan of up to 50% of the cost, subject to a maximum of ECU 250,000.

The scope of ECIP was enlarged in 1995 to include privatisation and private infrastructure projects and the facilities have been suitably amended to allow for the larger financing requirements of infrastructure projects. ECIP has become the greatest catalyst for EU investment in the partner countries. Both Asia and Latin America each absorbed one-third of all EU foreign investment in 1993. Notwithstanding ECIP, EU investment in Asia only accounts for 10% of FDI flows to the region and lags far behind FDI flows from the US and Japan which accounted for 17% and 28%, respectively. This may indicate that in areas of heavy investment activity, ECIP could need some changes if it is to play a more effective role. However, as far as the ACP are concerned, the dispersed and bureaucratic nature of the development cooperation and industrial assistance support mechanisms and facilities provided for them, combined with the little impact which these have had, provide a strong case to extend the ECIP approach to ACP countries, or at the very least to the more advanced among them for which such instruments are definitely more appropriate.

Given the various considerations that have been advanced in this paper, the following could be included in an ACP "wish list":

• Upstream support for political, economic, administrative and institutional reforms to create an enabling environment;
• Capacity-building to assist in ongoing policy analysis and policy formulation -- in industrial policy-making and macroeconomic policy making for example;
• Specific support for the finance sector to increase financial sector efficiency, encourage the mobilization of savings, and develop capital markets to develop an investor-friendly climate;
• Support for human resource development initiatives at the local or regional levels to ensure that there is a skills-base to stimulate and sustain FDI;
• Assistance to upgrade institutions and streamline procedures designed to support industrial coooperation, export promotion, and foreign investment;
• Instruments to support privatisation in the ACP and to mobilise private-sector resources for infrastructure development (The idea of an Infrastructural Fund being set up by the US for Africa can be borrowed);
• Instruments to support FDI in the ACP such as an ACP FDI Venture Capital Fund;
• Assistance for building up scientific and technical skills, including the establishment of IT parks to attract communications-intensive industries;
• Productivity and quality improvement schemes (eg ISO 9000 ) and the establishment of Technology Diffusion Schemes to transfer technology from the EU to the ACP countries;
• Development of a common position with the EU relating to a possible multilateral agreement on investment to control the proliferation of incentives while giving exemptions to countries like the ACP suffering from special handicaps in their efforts to attract increasing FDI flows and joint pressure for early conclusion of such an agreement;
• Greater coordination and integration of the various support mechanisms in a more business-like manner in the new Lomé Convention;
• Extension of the ECIP approach to all ACP countries or to those that request them;
• Increase in the focus on economic cooperation over development aid in different ACP countries as the specific circumstances of the country concerned may warrant;
• Assistance in projecting a more positive image of the ACP vis-a-vis the EU business community.