Foreign Direct Investment in ACP Countries

This document was prepared by UNCTAD United Nations Conference on Trade and Development)on the initiative of the ACP Secretariat (African, Caribbean and Pacific).

1. African, Caribbean and Pacific (ACP) countries, like developing countries in general, are increasingly adopting policies to attract foreign direct investment (FDI). They are doing so because it is now recognized that FDI can, under appropriate conditions, be an efficient means both of transferring a package of capital, skills and technology to host countries and of providing these countries with enhanced access to international markets. However, the benefits expected from FDI do not arise automatically. The impact of FDI depends indeed on many factors, crucial among them being the capacity of the host economy to absorb skills and technology, and the existence of conditions necessary to facilitate backward and forward linkages. Recent UNCTAD studies have illustrated some deficiencies in the possible positive impact of FDI in a number of ACP countries. It is underlined that this is to some extent the result of a policy framework that has not, so far, focused on optimizing the use of the resources that come with FDI. In designing policies to attract FDI, ACP countries need thus to create a policy environment which is conducive to maximizing the net benefits to be derived from FDI by the domestic economy.
2. ACP countries comprise a great variety of political and economic situations and, thus, differentiated investment conditions. In order to create an environment conducive to attracting FDI and enhancing its impact on development, it is important to review the different options and measures through which further improvements can be achieved. While some of these measures could be implemented only in the long term and, especially in the case of the least developed countries (LDCs) among the ACP countries, require considerable assistance within the framework of the Lomé Convention, others could be taken by the governments of host countries in the short term. This paper focuses on the policy environment in ACP countries and on the extent to which it is conducive to attracting FDI in a manner optimal to the national economies. Of equal importance, although not specifically addressed in this paper, is the fact that, in line with the Lomé Convention, the European Union and its member States ought to intensify support efforts aimed at promoting and increasing European foreign investment in the ACP States, which, as shown in this paper, continues to be relatively low.

I. Foreign investment trends in ACP countries

(i) General trends in FDI

3. The globalization of the world economy entails a growing interpenetration among economies. The role of FDI in this process has become increasingly important; in recent years, world FDI has grown more rapidly than world exports, and foreign affiliates? Sales now exceed world exports in value. However, ACP countries have remained, in relative terms, at the margin of the process of expanding FDI flows: more than 20 years after the signing of the first Lomé Convention, FDI flows into ACP countries have been mediocre, resulting in only 1 to 3 per cent share in the world inflows (annex tables 1 and 2). This share has declined in fact by a half, from some 3 per cent to 1.5 per cent, during the past decade -- the very period which witnessed accelerating investment flows that have benefited both developed and developing countries. Although this declining share of FDI corresponds to the diminishing weight of ACP economies in world trade and gross domestic product (GDP) (annex table 3), the decline is steeper than in terms of world trade and GDP. As FDI is considered to be an important vehicle for integrating the ACP group into the world economy, and transferring production resources from transnational corporations (TNCs) that could be used for the development of its own economy, this is a disturbing signal for ACP countries. The situation is further aggravated by the fact that FDI is increasingly concentrated in only a few ACP countries.
4. There are several reasons for the current level of FDI flows into the ACP as well as for the declining share of this country grouping in world FDI flows. FDI is, to a large extent, a function of location-specific advantages, such as the size of the domestic market, the growth of the domestic economy, openness to international trade and attractive combinations of cost and productivity. ACP countries as a group still present some shortcomings as regards these location-specific advantages:

C Small market size. The size of the economy is an important determinant of FDI. The volume of FDI depends on market size. Small market size justifies a small amount of investment, be it domestic or foreign. The ACP had a GDP of $261 billion in 1995, roughly comparable to that of individual countries such as Austria, Belgium/Luxembourg or Taiwan Province of China. The ACP share in world GDP declined from 1.8 per cent to 0.9 per cent during the last decade (annex table 3) and in the GDP of the developing world from 8 per cent to 5 per cent.

5. Market growth. This dynamic factor has a direct impact on the speed and direction of FDI flows. GDP in the ACP grew at an annual rate of 3.9 per cent during 1991-1995, nearly one-third of the growth rate of South, East and South-East Asia and half of that of Latin America (excluding the Caribbean). FDI stock in the ACP grew at 11 per cent between 1990 and 1996, compared with 23 per cent in South, East and South-East Asia and 17 per cent in Latin America.

6. Least developed countries. Of the 48 LDCs as defined by the United Nations, 44 are in the ACP, which itself comprises 70 countries. The reasons for the small FDI inflows into LDCs are already documented (UNCTAD, 1997a, pp. 52-56). In addition to the above-mentioned general economic factors, poor infrastructure facilities, adverse climatic conditions, remote geographical or land-locked positions and, in some cases, political instability are advanced as reasons for the low levels of FDI flows to least developed ACP countries. Although LDC member States in Asia benefit from increasing intraregional FDI, none of them is a member State of the ACP. As regards African ACP member States, intraregional FDI has not emerged to the same extent as in Asian LDCs.

   C Concentration of ACP countries in Africa. African ACP countries account for the bulk of ACP member countries (47 out of 70). Africa has not participated in the surge of FDI flows to developing countries (UNCTAD, 1997a, p. 56). Moreover, FDI inflows into Africa have been concentrated in a few countries, as in the case of the ACP. Egypt and Nigeria have constantly been among the top five FDI recipients in the African region (UNCTAD, 1997b, p. xix; UNCTAD, 1997a, p.61).

7. Slow trade growth. There is no complementarity between FDI and trade in the ACP despite the fact that such complementarity has intensified over the years as regards the developing world in general (UNCTAD, 1996a). In fact, as ACP trade loses ground, so does FDI. The share of the ACP in world exports and imports has declined (annex table 3). The slow growth of exports from the ACP has not triggered trade-supporting FDI inflows. ACP exports consist mainly of food and minerals, the world demand for which is low and subject to price volatility. The supply response of TNCs is thus weak. On the other hand, ACP countries' relatively low level of imports does not constitute an incentive for import-substituting FDI.

8. Limited diversification of industry structure. The heavy dependence on natural resources implies that the industry structure is not diversified -- a phenomenon which further reduces the attractiveness of ACP countries to foreign investors. Small or limited locational advantages also do little to attract FDI.

    

    

   (ii) European Union FDI in the ACP region

9. European Union (EU) investors are more active than other investors in the ACP region, accounting for half of FDI stock in that region in the mid-1990s (see annex tables 4 and 5). This is due to the large presence of African countries in the ACP membership. Because of geographical proximity and post-colonial ties with some EU partners (independent of the Lomé Convention), Western Europe has dominated FDI in Africa (UNCTAD, 1997b), although there is a sign that the United States and Asia are increasing their investments in these countries. In general, FDI flows from the EU to the ACP are small, accounting for only 1 per cent or less over the past decade (annex table 6). FDI flows from the EU to the ACP countries as a whole during 1992-1994 were almost equivalent to those to a single EU country such as Denmark or Greece (Eurostat, 1997).
10. The largest share of FDI from the EU goes to countries within Europe (UNCTAD and European Commission, 1996). Outside Europe, the United States is the most important host country for FDI from the EU. Developing countries as a group received about one-tenth of the stock of FDI from the EU. As regards inflows to ACP, African ACP and Caribbean ACP received almost the same amount of FDI from the EU in 1994 (annex table 6). Pacific ACP accounted for only one-tenth of total flows to ACP countries in that year. FDI flows from the EU are concentrated in mining and oil-production (Congo, Gabon, Nigeria, Zimbabwe etc.), and/or in tax havens (Bahamas, Dominica, Saint Kitts and Nevis, Saint Vincent and the Grenadines etc.). In Botswana, three-quarters of FDI in 1993 was in mining, and similarly in Zimbabwe, 40 per cent of FDI flows between 1993 and 1995 were directed to mining (UNCTAD, 1997b). Although this type of investment certainly reflects the comparative advantages of host countries, it is unlikely that the existence of the SYSMIN programme will have an impact on FDI flows to the mining industry.
11. Building a partnership on the basis of current programmes under the Lomé Convention gives rise to limitations, as these programmes do not include effective investment programmes. This calls for a wider and more effective FDI programme targeted particularly at capacity-building in the ACP countries. It is therefore recommended that recent EU initiatives on FDI in Asia be examined and a similar initiative be considered for the ACP group, as well as a possible extension of the Asia programme to some of the Pacific ACP States.
II. Policy considerations
12. The overall policy requirement for host governments seeking substantial inflows of FDI or other forms of foreign participation is the creation of an attractive climate for investors through macroeconomic stability, consistent policies and adequate institutional support. Many ACP countries have taken substantial steps in this direction in recent years, although there remain considerable variations in national policies and approaches. Potential foreign investors could find considerable differences in approaches and procedures regarding specific investment policies among the various ACP countries. Such differences notwithstanding, the overall climate for FDI or foreign technological participation in these economies is generally favourable and becoming increasingly so. Nevertheless, there is further action that could be taken to encourage FDI inflows. In this connection, it is important to take into account the main broad objectives of foreign firms engaged in FDI (see box 1) so as to be able to design an appropriate policy mix.

Box 1 What does a firm engaged in FDI seek? Natural resource-seeking FDI is the oldest form of TNC involvement in developing countries. It is undoubtedly trade-creating on the production (or output) side: FDI has often been a precondition for the production of primary commodities for foreign markets, especially in developing countries, and generates a stream of exports of natural resources that would not have otherwise occurred. Market-seeking FDI became the predominant motive for investing in the manufacturing sector of developing countries in the 1960s and 1970s during the heyday of import-substitution industrialization. This motivation was also paramount in the wave of United States investments in Europe in the early postwar period and in Japanese investment in the United States from the early 1980s. Generally, market-seeking investment in manufacturing is a gross substitute for exporting from the home country, and has arisen mainly as a result of import barriers in host countries. It has trade-reducing effects on the production side, but trade-creating effects as far as inputs used in production are concerned. It is possible for the total level of imports to remain unchanged or, in some cases, even to increase (export growth and capital inflow permitting). Any market-seeking investment will also normally have multiplier effects on domestic demand and production, which could lead to significant indirect increases in imports. There are causes other than trade barriers for market-seeking investment: significant transport costs, differences in consumer tastes and the need to adapt a product to local conditions and inputs. Recently, the formation or strengthening of regional groupings has given rise to significant investments in order to serve the enlarged markets of the integration schemes. Efficiency-seeking FDI occurs when foreign firms begin to locate part of their value-added chain abroad in order to improve the profitability of their overall operations. The oldest such investments have been labour-seeking investments. There are other, more complex forms of efficiency-seeking investments that are closely related to the emergence of integrated international production. One increasingly important form for developing countries is component outsourcing. The main driving force of this has been the increase in wages in the developed countries, particularly in Japan and Europe. Strategic asset-seeking FDI usually takes place at an advanced stage of the globalization of a firm's activities. Firms, including a few from developing countries, may invest abroad in order to acquire research and development capabilities (e.g., Japanese or Republic of Korea investment in microelectronics in the United States). Source: UNCTAD secretariat, Transnational Corporations, Foreign Direct Investment and Development (forthcoming publication).

13. A better performance would require considerable improvement in the basic factors determining the general investment climate (discussed in the preceding section). Such factors do not usually fall under direct government control and, in any event, would take a long time to undergo any change. However, an obvious step would be to improve policies, regulations and administrative practices that affect FDI, drawing to the extent possible on best practices in other countries. The experience of many ACP countries, particularly in Africa, indicates that there are a number of options and measures which merit special consideration. These are reviewed below.

(i) Overall regulatory framework

14. A healthy investment climate requires a general legal framework that is conducive to facilitating business. In this respect, business and commercial legislation is particularly important. Complex or confusing legislation in this area poses problems for investors. Indeed, several European firms interviewed in a survey (UNCTAD and European Commission, 1996) regarded certain legal practices as a deterrent to their activities. Although the situation differs, of course, from country to country, it was pointed out that traditional ways of doing business can be very different from those prevailing in developed countries. This is the case, particularly with respect to marketing and distribution arrangements. Of course, legal certainty does not obviate the need for foreign investors to adapt to local market conditions. Overall, foreign investment, like any economic activity, thrives best in a stable, predictable and transparent environment. In this respect, policy transparency, bilateral investment treaties or sectoral agreements contribute to the creation of an environment conducive to investment.
15. Many ACP countries, particularly in Africa (UNCTAD 1995), have recently enacted new investment codes intended to encourage private individuals or companies to invest in the host country. These codes also identify the host country's priorities and provide for fair treatment for the investor.
16. It should be noted that an investment code, however well drafted, is not in itself sufficient to attract or to regulate investment. An overall legal infrastructure for private business activity -- for national and foreign investors alike -- consisting of laws which provide for the creation of business entities, enforcement of contracts, private ownership and transfer of property, assessment and payment of taxes, foreign exchange dealings etc., is a prerequisite. ACP countries have no dearth of legislation governing private sector activity. However, much of it was drawn up in the colonial period, and many of the laws have not been updated since then.
17. Consequently, provisions in the new investment codes concerning foreign investors are often contradicted by other existing laws. In particular, FDI liberalization policies are undermined by foreign exchange control legislation, tax regulations and labour laws. Often, the implementation of the investment code is vested in newly created FDI promotion agencies or 'one-stop shops', while the implementation of the other laws remains vested in the traditional ministries. Therefore, the extent to which a foreign investor stays within the purview of the investment code and is 'excused' from otherwise applicable but conflicting legislation largely depends on the influence that any given agency or ministry has on the national decision-making process and on whether the most powerful agencies are in favour of the proposed investment.
18. As a result, many investors develop the impression that arrangements for investments are less than transparent and that some form of extra effort is required if projects are to materialize. In those cases where such efforts could take the form of illicit payments, many foreign investors would be deterred from investing so as not to contravene their countries' anti-corruption laws.
19. The host countries concerned may consider redrafting the relevant laws in order to provide clarification; at the very least, their representatives should seek to explain to potential investors the proper relationship between new, open policies and the prevailing overall legal and economic regime. It is important to emphasize that it is not possible to properly draw up requisite new laws at very short notice. In this respect, it should be pointed out that slow but steady effort towards building a solid legal framework will instil greater confidence in investors than rushed-through legislation which would subsequently require frequent amendment.
20. In a globalizing world economy, the appropriate protection of intellectual property rights constitutes an important component of an overall regulatory framework for FDI. As pointed out above, the technological contribution of international firms is one significant benefit expected from FDI. Following the conclusion of the Uruguay Round of Multilateral Negotiations and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), ACP countries face new challenges and opportunities with regard to the implementation of this Agreement (see UNCTAD, 1996b). Box 2 describes the general situation of the United Republic of Tanzania vis-à-vis the TRIPS Agreement.

(ii) Enhancing policy coherence

21. An appropriate regulatory framework needs to reduce, if not to eliminate, the risk that private enterprises, including foreign firms, perceive, objectively or subjectively, as arising from macroeconomic instability, lack of consistency in policy implementation, long records, if any, of unwarranted government interference in business, and the threat of civil strife. While governments of many developing countries, including ACP countries, have clearly improved policies in general, and policies specifically related to FDI in particular, there is still need in some cases to enhance the image of policy coherence both with foreign investors and with the national private sector.

Box 2 The TRIPS Agreement United Republic of Tanzania Currently, the United Republic of Tanzania has laws covering patents, trade marks, service marks and copyrights. It is expected that a law on trade secrets will come into operation in 1996 or 1997. There are no laws covering geographical indications, integrated circuits or plant varieties, and it is unclear whether software is protected. Administrative offices are small and need both expansion and modernization. There is no systematic arrangement to enforce intellectual property laws. No specialized enforcement units exist, and border controls are ineffective because customs officials are untrained in intellectual property rights. Judges are generally not particularly aware of the requirements of the latter. It is interesting to note, however, that in recent years local musicians have begun to agitate for stronger enforcement of their copyrights, since their works have been subject to piracy. The United Republic of Tanzania is likely to avail itself of the full transition period because of the substantial requirements for change and modernization it faces. Legislative changes, establishment and strengthening of administrative offices, expanding enforcement capabilities and providing training are estimated to cost between $1 million and $1.5 million. Source: UNCTAD, 1996b.

22. For governments to attract investment, there is thus need to have a positive record in terms of (i) macroeconomic management, (ii) policy consistency, (iii) fair treatment of all investors, and (iv) no arbitrary involvement in private business. There are two ways in which such record can be improved. The first is to adopt some version of an independent currency board or to join a common currency, such as the CFA, as a discipline-imposing constraint on monetary financing of fiscal deficits. This would send the signal to investors that permanent improvements in macroeconomic stability -- i.e. low inflation and a stable exchange rate -- can be attained and maintained. The second would be to adhere to international or regional agreements which have a confidence-building bearing on investment. These would include tariff binding agreements under the WTO and regional or bilateral treaties on FDI.

(iii) Authorization procedures

23. Authorization procedures have been the subject of attention in all reforms relating to investment. The main objective of the reforms has been to respond to the criticism that the process is usually excessively tedious and cumbersome and that bureaucratic delays lead to significant cost increases for investors. In response to such criticism, most investment codes have sanctioned the establishment of 'one-stop shops' to process and facilitate the approval of investment proposals. However, studies indicate that shortcomings still exist.
24. First, in a number of cases, the one-stop shop has become simply an additional stop on a route that still involves a wide range of government departments, several of which may have different perceptions of a given project. Second, in a few cases, the one-stop shops go beyond the traditional screening for compliance with legal requirements or incentives qualification, and go so far as to involve themselves in screening potential investments for financial viability. It should be mentioned that the screening of foreign investment applications in order to establish their viability is a complex process. It requires considerable expertise and is a time-consuming exercise.
25. At the outset, concerned countries should therefore decide whether approval procedures for foreign investment are necessary, or whether a simple registration procedure would suffice. It would be advisable for authorities to ensure that officials in the one-stop agencies are in fact fully representative of all the ministries concerned. At the same time, the rules regarding investment authorization should be transparent and formulated in clear terms so as to minimize the scope for discretionary decisions. This would reduce the opportunities for illicit practices and ensure that the investment liberalization scheme is operated with fairness and consistency. Above all, however, emphasis should be placed on the need for decisions to be made with great efficiency. At the present time, there are countries in which investment approval procedures normally take more than a year to run their course.

(iv) Incentive mechanisms

26. Incentives may be granted conditionally or unconditionally. Those granted conditionally may be linked to performance requirements which in some cases can have a disincentive effect on the investment (incentives are then used to compensate for this disincentive). They can be granted, financed and/or administered at all levels of government, i.e. at the supranational, national, regional and local levels. Incentives may be granted automatically (upon compliance with certain qualifying conditions), or there may be varying degrees of discretion on the part of the administering authority to decide on the awards. Also, awards may be granted before the conditioning element has come into existence, or retroactively, after the condition has been met (obviously, the choice between ex ante and ex post facto awards is very much dependent on the type of incentives chosen).
27. Thus, not only is there a wide array of choices for designing FDI incentives, but, also the characteristics of their administration and implementation can make a difference. Indeed, the same benefit for the foreign investor may cost a government more or less, depending on the type of incentive used and on how it is administered (box 3 describes different types of incentives). In practice, however, in the case of large or important FDI projects, incentives are often granted as part of a negotiation process with an investor, with investors infrequently demanding incentives, be it to match incentives offered elsewhere or to compensate, e.g. for perceived higher structural costs. In this event, the line between what is an incentive stricto sensu and the larger package of conditions and counter-conditions being negotiated is often difficult to draw.

Box 3 FDI incentives Fiscal incentives. Their overall objective is to reduce the tax burden for a foreign investor. In addition, some incentives relate to the entire tax regime applying to a foreign firm in a host country; for example, tax stabilization consists in freezing the fiscal regime at its existing level for extended periods. This form of incentive relates generally to special regimes applying to important projects (e.g. in mining). The various types of tax incentives in a host country can have a different effect on the overall corporate tax paid by a parent company, depending on the home country's tax laws and any tax treaties between the home and host countries. The purpose of double taxation agreements is to allow for taxes paid in the host country to be deducted from corporate income taxes at home. However, this does not necessarily prevent a home country from taxing the income that is exempted from tax in a host country. For this reason, certain types of double taxation agreements provide for tax sparing, whereby the home country gives credit for taxes that would have been paid in the host country if no tax exemption had been granted. This device ensures that tax concessions granted in a host country benefit foreign investors instead of resulting in a transfer of tax revenue from the host to the home country. Financial incentives involve the provision of funds directly to firms to finance new foreign investments or certain operations, or to defray capital or operation costs. The most common types include government grants, subsidized credit, government equity participation and insurance at preferential rates. Other incentives. Some types of incentives elude easy classification, their common denominator being that they are designed to increase the profitability of a foreign affiliate by non-financial means. Examples are subsidized dedicated infrastructure, certain subsidized services, market preferences, and preferential treatment on foreign exchange. Source: Incentives and Foreign Direct Investment (UNCTAD/DTCI/28).

28. Experience shows that 'front-loaded' incentive systems tied to performance requirements are counter-productive because, in the first place, many firms that do not need incentives nevertheless receive them, and this redundancy makes the overall system very costly. Secondly, enforcement of the conditions of incentive programmes is usually too difficult to ensure. Rather, if a country wishes to provide support to certain industries, it should use a 'back-loaded' incentive system which rewards firms for actual achievements at the end of the investment cycle and avoids the imposition of operational restrictions. Firms that achieve the goals of an incentive system -- for example, firms that create and maintain a certain number of jobs, transfer technology or promote exports -- could receive a substantial fiscal incentive. In this way, the productivity of the incentive system is ensured. Only willing and successful firms are rewarded.
29. In a number of ACP countries, the investment code attempts to provide a comprehensive incentive system for private investment. But when an investment code contains provisions that are too detailed (e.g. on income tax, as is the case in many investment codes) and makes these generally applicable to all sectors, this can lead to highly inappropriate and discriminatory policies at the industry level. Each important economic sector requires, to some extent, special attention and distinctive policies and laws. In similar situations, firms should receive the same treatment regarding such things as the establishment, ownership and control of enterprises, taxation, full access to courts and equal protection under the law.
30. In many cases, general tax concessions are provided in an investment code in order to offset the negative effect of unusually high tax rates which would otherwise make a particular fiscal regime uncompetitive by international standards. Governments should instead aim at reforming the tax regime so as to make it attractive and applicable: they should revise the actual legislative framework governing taxation rather than try to fix parts of it through concessions granted under a law governing FDI.
31. In view of the competitive global investment environment, governments in ACP should, in undertaking a complete overhaul of their investment incentive packages, take into account the experiences of other developing regions. Some of the issues that need to be addressed are the impact of tax concessions, depreciation allowances, minimum wage and employment legislation, training incentives, interest-rate policies, policies on the repatriation of profits, and foreign exchange transactions.

(v) Privatization-related FDI

32. A policy action likely to make an immediate contribution to the improvement of investment conditions in many ACP countries relates to privatization programmes. Judging from the experience of other countries, privatization programmes with foreign participation can provide a vehicle to increase FDI flows (with potential qualitative contributions to the economy) over a long period of time, since FDI flows can continue after the acquisition of assets through privatization. Such programmes have been a major factor in the rapid increase of FDI flows to Latin America and Central and Eastern Europe. To benefit from privatization-related FDI, existing programmes need to be improved upon and perhaps new programmes launched. In some cases, this may require the attainment of a broader political consensus so as to end the stop-go nature of some of these programmes, make them more transparent and expand them to include firms of all sizes and from all sectors of the economy. The last of these considerations may be of special importance to countries that need to compensate for certain deficiencies in investment conditions by increasing the attractiveness of privatization programmes. Furthermore, including only loss-making firms, while excluding profitable firms, would certainly not make a privatization programme attractive. The attractiveness of programmes could be further enhanced in some countries by linking them to debt-equity swaps.

(vi) Improving the technological infrastructures and skill base for competitiveness

33. The factors that determine competitiveness for FDI in today's global economy go beyond a good resource endowment or low-cost labour. Excellent state-of-the-art telecommunications, transport and other facilities run by competitive and efficient managers and operators are also needed.
34. ACP countries, with the support of the international community, need to put more emphasis on developing infrastructure and business services in the improvement of their competitive edge. Basic utilities such as electricity and water services are a necessary condition for the enhancement of the profitability of many firms. All ACP countries should make substantial investments in national infrastructural facilities and participate effectively in subregional and regional infrastructural development.
35. However, it cannot be denied that the capital and technology needed to upgrade such facilities to international standards are lacking in many ACP countries. In such cases, governments should therefore consider key infrastructure as a prime target for the various modalities of privatization programmes open to foreign investors so as to secure the capital and technology necessary for upgrading facilities. When privatizing infrastructure, governments need to address the issue of transferring a public monopoly into a private monopoly. In this respect, it is important to study all possible forms of privatization and their implications while taking into account the specific features of a particular industry (see the relevant discussion in UNCTAD, 1997a).
36. Besides modern infrastructure, an increasingly important factor in attracting FDI is the availability of a good technical and skill base. In this connection, there is an urgent need for mid-level technical and supervisory skills in many ACP countries. To rectify this situation, these countries should consider removing constraints on the employment of expatriates where such constraints reduce the overall capacity of investors to operate efficiently. This may involve a greater willingness to grant work permits to foreigners when it is clear that no suitably qualified national is available for a certain position, and the introduction of incentive measures to attract highly skilled foreign workers. At the same time, more business training institutes should be established to improve local capacity and create practical skills in areas such as manufacturing, industry and banking. On-the-job training should also be encouraged.
37. The skills and capital of overseas ACP nationals, as well as the capital of resident citizens being held outside the country, are important resources that should be taken into consideration in attempts to build up local skills, technological capability and entrepreneurship in general. There is probably no one particular measure different from those measures that attract expatriates or foreign investors which could be targeted in order to accelerate the redeployment of these skills and capital back to ACP countries.
38. New initiatives of the European Union and its member States, in the context of the Lomé Convention, should be targeted at assisting ACP countries to improve their technological infrastructures, particularly through capacity-building. A number of new initiatives and programmes in this sphere could be envisaged, including targeting special funds for quality control and training with a view to improving the quality of ACP manufacturing; linking high-level industry-supporting institutions in Europe (such as the Danish Technology Institute) with similar incipient organizations in ACP countries (e.g. centres for innovation and enterprise development) in programmes to strengthen technological capacity and quality with a view to training local staff and advising them at the more sophisticated stages of production and technology upgrading.
39. Another type of more targeted activity by the European Union could consist in arranging partnerships between European and ACP businesses, including: identifying partners; establishing a database of well-researched, reliable partners for prospective investors in ACP countries; and organizing investment missions for European firms to ACP countries to meet local businessmen, policy makers and civil servants and to further their knowledge and experience of opportunities existing in ACP countries.
III. Concluding remarks
40. Since the onset of the debt crisis in the early 1980s, FDI has come to be perceived in a much more favourable light than in the past by developing country governments. There are good reasons for this reassessment of the potential role of FDI in development. Under current conditions and if the policy framework is adequate, FDI involvement in developing countries has the potential for making an important contribution to their industrialization and development. In an increasingly liberalized and globalized world, the current need of developing countries is to strengthen their competitiveness in world markets, while accumulating capital, both physical and human. Policies to ensure the deployment of assets through FDI -- in particular, technology, advanced skills and market access -- are a component of an industrial strategy that promotes this goal.
41. As far as developing host countries are concerned, however, foreign direct investment should not be perceived as a panacea, and international firms should not be expected to do everything. They probably do not contribute much to employment and may have little impact on income distribution. And their presence can pose certain difficulties that require regulation by the domestic authorities of host countries. But they do possess tangible and intangible growth-enhancing assets that are in short supply in developing countries. The extent to which these assets can contribute optimally to the creation of dynamic comparative advantages in developing countries depends on the policy environment in ways that go well beyond the mere liberalization of FDI regimes and the granting of legal protection and guarantees to foreign investors.
42. The creation of liberal FDI regimes can, indeed, only be a starting point in the strategy to attract investment. Another important step must be to advertise the existence of such regimes and to ensure that potential investors are fully informed of the benefits to be derived from investing in a particular country. Accordingly, there is a clear need for ACP policy makers, especially in those countries with existing FDI potential, to adopt aggressive marketing strategies in leading home countries and in other centres of investment financing.
43. As part of this approach, individual countries could consider using the services of international organizations, including UNCTAD, that have experience and expertise in dealing with foreign investment and technology transfer. These organizations could assist not only in the identification of local projects which may be of interest to foreign investors, but also in the assessment of various proposals for FDI schemes offered by different companies. Furthermore, they could be called upon for assistance in formulating project proposals from governments to particular companies and in highlighting the different linkages from which certain forms of investment may stand to benefit.
44. As the experience of other countries shows, in the long term the countries most likely to see increased FDI flows are those that not only create a climate favourable to all private investment -- be it by domestic or foreign firms -- but also carry out reforms to improve their macroeconomic policies. Two points may be noted in the present context. In the first place, macroeconomic reforms do not need to take on a particular form or follow a specific model. It is clearly the prerogative of every government to determine the pace, nature and extent of reform as well as the main objectives of the reform process, taking into account the prevailing local, social and political conditions. The only point that must be emphasized is that, without basic reforms, most ACP countries will not be able to attract and retain substantial infusions of capital and technology from abroad. Secondly, the relationship between capital inflows and macroeconomic reforms is hardly straightforward. For instance, while it is true that reforms should stimulate interest among investors, it is equally true that investments are necessary if reforms of a lasting nature are to be introduced. Initially, therefore, an important challenge will be for policy makers to implement effective reform measures that will serve to inspire investor confidence.
45. It should, in addition, be noted that some countries with valuable natural resources, especially oil, are likely to continue receiving substantial FDI, even without major reforms. If, however, these countries want to diversify FDI into other sectors, they too will have to undertake the necessary fundamental reforms.
46. In brief, in order to gain a better insight into the broad issues involved in promoting FDI in the ACP countries, it might be useful to start with a series of possible subregional schemes to strengthen cooperation programmes, including the organization of business roundtables, partnering programmes, seminars and workshops on both general and sectoral issues, as well as a number of training projects, and to design projects for technological cooperation, through both seminars and specific projects for improving the dissemination of technology.

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______ (1996a). World Investment Report 1996: Investment, Trade and International Policy Arrangements (New York and Geneva: United Nations), United Nations publication, Sales No. E.96.II.A.14.

______(1996b). The TRIPS Agreement and Developing Countries (Geneva: United Nations), United Nations publications, Sales No. E.96.II.D10.

______ (1997a). World Investment Report 1997: Transnational Corporations, Market Structure and Competition Policy (New York and Geneva: United Nations), United Nations publication, Sales No. E.97.II.D.10.

______ (1997b). World Investment Directory 1996: Volume V, Africa (Geneva: United Nations), United Nations publication, Sales No. E.97.II.A.1.

_______ and European Commission (1996). Investing in Asia's Dynamism: European Union Direct Investment in Asia (Luxembourg: Office for Official Publications of the European Communities).

UNCTC (United Nations Centre on Transnational Corporations) (1992). The Determinants of Foreign Direct Investment: A Survey of the Evidence (New York: United Nations), United Nations publication, Sales No. E.92.II.A.2.

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