Sri Lanka should take a cue from Ireland on how to attract FDI
21 Sep 2015 - {{hitsCtrl.values.hits}}
One of Sri Lanka’s major rugby promoters in recent times Malik Samarawickrama is the new minister tasked with attracting foreign direct investment (FDI). He has had international exposure unlike many others previously on the job because of his involvement in the export of garments and negotiating with his numerous joint venture (JV) partners. But his new job unlike before is now on a global scale and the country is faced with a huge forex deficit.
FDI is one of the best routes to build up a country’s forex reserves. The challenges to attract FDI are enormous, in particular because many developing and emerging economies actively seek to attract FDI and that is intensifying global competition among governments to attract FDI.
The main concern is that global “bidding wars” to attract FDI may be producing an uncontrolled upward spiral in costly “investment incentives” that weaken public finances while introducing market distortions in the allocation of real investment and/or that such “wars” are putting excessive downward pressure on global standards of protection of the environment and/or of workers’ rights.
However, the global competition among governments to attract FDI could also produce beneficial effects. These effects may include inducing governments to strengthen their economic “fundamentals” (e.g., by pursuing policies to enhance the supply of modern infrastructure and skilled workers, by achieving greater macroeconomic and political stability, by improving long-term economic growth perspectives) which should in turn promote economic development — almost independently of their impact on FDI flows per se. Another effect may be to increase the global supply of FDI to the benefit of investors and host economies alike.
Current situation
The global picture for FDI has changed. It is a measure not only of the long tail of America’s special position in the global economy but also how bad things are still in the West. Going forward, globally businesses will have to deal with stagnant demand, workers will face flat wages and investors will have to cope with a world in which AAA assets aren’t what they used to be.
Therefore, due to the debt crisis in the West and the emerging challenges in the East, the capacity of many big multi-national companies (MNC) to invest has been weakened by reduced access to financial resources, both internally and externally, and their propensity to invest has been severely affected by their internal economic challenges and heightened political risks.
The effectiveness of the nation’s responses – at both the national and international levels will be crucial for creating favourable conditions to attract FDI flows. The challenge therefore is to provide the “right” stimulus to investment and to renew our commitment to an open and stable economy. Perhaps Sri Lanka should study how Ireland leads the world in attracting FDI and reposition Sri Lanka as a destination for high-value FDI. For example, what motivated Apple to invest 850 million euros to set up a data centre in Ireland and not Denmark, Singapore or Sweden?
Long-term participation
FDI generally refers to long-term participation by one country in another country. It usually involves participation in a JV, capital transfer, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and stock of foreign direct investment. There is substantial evidence that such investments benefit host countries.
In Sri Lanka, during periods of relative economic and political stability, FDI inflows have responded positively. For example, during the periods 1979-1982, 1990-1993 and 2002, FDIs increased to a maximum of US $ 242 million. In 2003, the inflows of FDIs, including privatization proceeds, increased by US $ 30 million. The realized inward investment flow was mainly to the power and energy sectors, port-related developments, telecommunications and manufacturing.
However, the net FDI was marginally lower in 2003 owing to larger outflow of US $ 27 million as compared to outflow of US $ 11 million in 2002. According to the Board of Investment, in 2008, the services sector attracted 362.3 million dollars’ worth of investments, with telecom leading with US $ 290.7 million followed by power generation with US $ 46 million.
In 2010, FDI to Sri Lanka fell by 14 percent to US $ 516 (Rs.56.7 billion) against the US $ 601 million (Rs.66.1 billion) in the year 2009. About 59 percent of FDIs were for infrastructure development projects, while manufacturing and services sectors attracted about 31 percent and 9 percent, respectively. In 2013 and 2014, Sri Lanka attracted, according to the Central Bank, US $ 1380 million and US $ 1686 million, respectively, however short of the U$ $ 2 billion target set by the Rajapaksa government.
Importance of FDI
FDI has proven to be resilient during a financial crisis. A good example would be the Mexican crisis that took place during 1994-1995 and the Latino crisis in the 1980s. FDI also allows the transfer of expertise and technology, particularly in the form of varieties of capital inputs, which cannot be got via financial investments or by trading in goods and services.
The best solution for developing countries to increase their overall amount of inward investment of all kind is to focus on improving the environment for investment; the functioning of capital markets and the companies interested in attracting FDI need to improve governance within their enterprises, skill levels, internationalize and work towards becoming genuine multinational enterprises. By doing so, they are likely to be rewarded with increased investment as well as with more capital inflows.
Sri Lanka could very well attract more foreign investment and develop faster if we improve our infrastructure, workforce skills, have efficient capital markets and provide sustainable legal guarantees to protect investment and in addition strengthen governance in both the public and
private sectors.
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