FDI and investment climate
Crucial for Namibia
High Economic Intelligence (HEI) Investments recently organised an economic conversation under the theme, "Foreign Direct Investment (FDI) and the Domestic Investment Climate – The Discovery of Oil in Namibia", in partnership with Debmarine Namibia, Old Mutual and De Beers Namibia Holdings. HEI's managing director shares the insights gained.
Salomo Hei - Recognising the positive relationship between foreign direct investment (FDI) and gross domestic product (GDP) growth rates, policymakers and stakeholders are actively exploring avenues to enhance FDI inflows and foster sustainable economic growth.
In Namibia, FDI inflows are predominantly attracted to the mining and financial intermediation sectors, while the fishing, fish processing and other sectors receive comparatively lower attention.
According to the Bank of Namibia (BoN), in 2019 the mining and quarrying sector attracted about N$53 million of FDI inflows, followed by the financial intermediation sector with about N$25 million. The BoN projected that in 2022, these sectors would attract FDI inflows of about N$85 million and N$27 million, respectively.
The role of investment, in particular, FDI, is regarded as one of the most important contributors to economic growth.
Growth
The past quarter century has witnessed remarkable growth in FDI flows all over the world. This is because many countries, especially developing countries, see FDI as an important element in their overall strategy for economic development.
FDI to African countries hit a record US$83 billion in 2021. This was more than double the amount reported in 2020, when the Covid-19 pandemic weighed heavily on investment flows to the continent.
Despite the strong growth, investment flows to Africa accounted for only 5.2% of global FDI, up from 4.1% in 2020. While most African countries saw a moderate rise in FDI in 2021, around 45% of the total was due to an intrafirm financial transaction in South Africa.
In light of the economic changes and developments around the globe, many countries lack investments that may lead to new incentives for local and regional development.
Change needed
In most transition economies, there is a need for structural changes.
Domestic capital, in most of the transition economies, is incapable of meeting the huge investment needs that transition required.
In this context, FDI presents an important source of new financial sources that can support the Namibian economy.
Subsequently, not every country can attract the right mode of FDI, nor does every investor risk his investments without studying the local conditions in the host country.
To understand the interaction between foreign investors and the local conditions in the host economy, it is necessary to understand the motivations of foreign investors.
Namibia
The discovery of oil in Namibia can be seen as a blessing to many, but it has been viewed as a curse in other quarters. However, there are lessons to be learned from other oil-producing countries.
Over the past two decades, the global economic landscape has witnessed notable shifts and developments.
From 2004 to 2020, the concentration of total world output has primarily been observed in East Asia and the Pacific, with China emerging as a prominent player.
In a significant turning point, China surpassed the manufacturing output of the United States and the European Union in 2010, solidifying its position as a global economic powerhouse.
Furthermore, the energy sector has experienced a paradigm shift as the world moves towards a more sustainable future.
After a century of rapid growth in energy demand, projections indicate that this demand will likely plateau by 2030. This deceleration can be attributed to the increasing integration of renewable energy sources into the global energy mix.
The growing prominence of renewable energy technologies is expected to reshape the energy landscape, leading to a more balanced and environmentally conscious approach to meeting energy needs. This however should be looked at in context as the transition cannot happen overnight.
Positive interaction
HEI is of the view that FDIs have a direct effect on local and regional economic growth, if they contribute to capital accumulation and enable the know-how and technology transfer to the host country.
Modern growth theory predicts a positive interaction between FDIs and economic growth as foreign investment flows improve local conditions (human capital, physical capital, institutions) and transfer productivity-enhancing technology to the host countries.
It is equally important to model these assumptions in the Namibian context to test if these predictions hold for the domestic economy on past trends.
In terms of global economic performance, the 2023 outlook has been subject to adjustments.
Global forecast
The global GDP forecast for the year has been revised slightly downward, reflecting a 0.1% decrease compared to the earlier predictions in the World Economic Outlook for January 2023.
However, analysts remain cautiously optimistic as the outlook shows a projected rebound to 3.0% growth in 2024. Similarly, Sub-Saharan Africa's GDP outlook for 2023 has also been revised downward by 0.2% since the January 2023 update.
Nonetheless, expectations point towards a recovery in 2024 with a projected growth rate of 4.2%.
In terms of FDI: Historically, developed nations have driven FDI inflows. However, recent trends indicate a shift towards developing nations as major contributors to global FDI inflows.
In 2021, FDI inflows for developing nations amounted to US$836 570 billion, while for developed nations amounted to US$745 736 billion.
African context
Examining the broader African context, the export base of many African countries remains structurally rigid and specifically raw commodity-based, leaving their economies vulnerable to external factors and limiting their overall business competitiveness.
Moreover, challenges persist in infrastructure development and business environment across the continent.
Zambia, for instance, grapples with poor infrastructure, weak protection of property rights, and high costs of doing business, impeding its progress and growth potential.
South Africa’s problems entail: addressing the persistent manifestations of the architecture of colonisation and apartheid, the constitutional imperative (to correct the wrongs of the past), the expression of the constitutional promise (an ongoing national endeavour), the accidental evolution of the national business architecture (Eskom, Iscor, Sasol, SAA, Dene), the structural design of the workplace dynamics (job reservation policies, mining industry practices), and the structural exclusion of black business.
The national problem statement execution paralysis for South Africa focuses on three pillars on redress – BEE, employment equity and public procurement.
Solutions
To address these challenges, experts emphasise the importance of strategic public investments with a strong emphasis on policy certainty to attract FDIs to stimulate supply-side responses in non-critical economic sectors, infrastructure development and human capital.
By diversifying economic activities and reducing dependence on foreign expertise, African countries can strengthen their long-term competitiveness and resilience.
In addition, ensuring fiscal discipline over oil revenues is crucial for sustainable economic development.
This approach allows for prudent management of resources, while simultaneously addressing pressing issues such as unemployment, poverty eradication, healthcare improvements, food security, and the fight against corruption.
By adopting such measures, African nations can lay the foundation for a more inclusive and prosperous future.
‘Crucial’
The augmentation of domestic capital and the enhancement of efficiency through the transfer of new technology, innovation, and best practices is crucial.
FDI has both benefits and costs, and its impact is determined by the country’s specific conditions in general and the policy environment in particular.
This is in terms of the ability to diversify, the level of absorption capacity, the targeting of FDI, and the various opportunities for linkages between FDI and domestic investment.
The global economic climate remains unstable, leaving small and open economies facing unfavourable economic conditions. The economies have been experiencing a slowdown in growth, mounting debt, and fiscal imbalances.
Adequate policy measures must be implemented to dampen these unhealthy trends, that is, policies be adopted that promote innovation, productivity growth, competitiveness, and investment.
Impact
FDI and the discovery of oil will positively impact growth when host country conditions are adequate.
The impact will not be significant when considered in isolation and can be negative overall if the inadequacies of the absorptive capacity persist.
Foreign investment projects usually boost demand for energy and modern telecommunications, road, and transport systems. These developments, especially those related to telecommunications, transport, and energy, increase productivity and efficiency, leading to a rise in output.
Therefore, policies that seek to improve infrastructure could ultimately lead to sustainable development and a higher standard of living for residents.
Efforts in the domestic economy should be made to invest in research and development.
This will assist with building the manufacturing base and improving technology for the country.
The industrialisation by invitation strategy proposed by Lewis (1950) is still valid today, and should be explored in Namibia.
In Namibia, FDI inflows are predominantly attracted to the mining and financial intermediation sectors, while the fishing, fish processing and other sectors receive comparatively lower attention.
According to the Bank of Namibia (BoN), in 2019 the mining and quarrying sector attracted about N$53 million of FDI inflows, followed by the financial intermediation sector with about N$25 million. The BoN projected that in 2022, these sectors would attract FDI inflows of about N$85 million and N$27 million, respectively.
The role of investment, in particular, FDI, is regarded as one of the most important contributors to economic growth.
Growth
The past quarter century has witnessed remarkable growth in FDI flows all over the world. This is because many countries, especially developing countries, see FDI as an important element in their overall strategy for economic development.
FDI to African countries hit a record US$83 billion in 2021. This was more than double the amount reported in 2020, when the Covid-19 pandemic weighed heavily on investment flows to the continent.
Despite the strong growth, investment flows to Africa accounted for only 5.2% of global FDI, up from 4.1% in 2020. While most African countries saw a moderate rise in FDI in 2021, around 45% of the total was due to an intrafirm financial transaction in South Africa.
In light of the economic changes and developments around the globe, many countries lack investments that may lead to new incentives for local and regional development.
Change needed
In most transition economies, there is a need for structural changes.
Domestic capital, in most of the transition economies, is incapable of meeting the huge investment needs that transition required.
In this context, FDI presents an important source of new financial sources that can support the Namibian economy.
Subsequently, not every country can attract the right mode of FDI, nor does every investor risk his investments without studying the local conditions in the host country.
To understand the interaction between foreign investors and the local conditions in the host economy, it is necessary to understand the motivations of foreign investors.
Namibia
The discovery of oil in Namibia can be seen as a blessing to many, but it has been viewed as a curse in other quarters. However, there are lessons to be learned from other oil-producing countries.
Over the past two decades, the global economic landscape has witnessed notable shifts and developments.
From 2004 to 2020, the concentration of total world output has primarily been observed in East Asia and the Pacific, with China emerging as a prominent player.
In a significant turning point, China surpassed the manufacturing output of the United States and the European Union in 2010, solidifying its position as a global economic powerhouse.
Furthermore, the energy sector has experienced a paradigm shift as the world moves towards a more sustainable future.
After a century of rapid growth in energy demand, projections indicate that this demand will likely plateau by 2030. This deceleration can be attributed to the increasing integration of renewable energy sources into the global energy mix.
The growing prominence of renewable energy technologies is expected to reshape the energy landscape, leading to a more balanced and environmentally conscious approach to meeting energy needs. This however should be looked at in context as the transition cannot happen overnight.
Positive interaction
HEI is of the view that FDIs have a direct effect on local and regional economic growth, if they contribute to capital accumulation and enable the know-how and technology transfer to the host country.
Modern growth theory predicts a positive interaction between FDIs and economic growth as foreign investment flows improve local conditions (human capital, physical capital, institutions) and transfer productivity-enhancing technology to the host countries.
It is equally important to model these assumptions in the Namibian context to test if these predictions hold for the domestic economy on past trends.
In terms of global economic performance, the 2023 outlook has been subject to adjustments.
Global forecast
The global GDP forecast for the year has been revised slightly downward, reflecting a 0.1% decrease compared to the earlier predictions in the World Economic Outlook for January 2023.
However, analysts remain cautiously optimistic as the outlook shows a projected rebound to 3.0% growth in 2024. Similarly, Sub-Saharan Africa's GDP outlook for 2023 has also been revised downward by 0.2% since the January 2023 update.
Nonetheless, expectations point towards a recovery in 2024 with a projected growth rate of 4.2%.
In terms of FDI: Historically, developed nations have driven FDI inflows. However, recent trends indicate a shift towards developing nations as major contributors to global FDI inflows.
In 2021, FDI inflows for developing nations amounted to US$836 570 billion, while for developed nations amounted to US$745 736 billion.
African context
Examining the broader African context, the export base of many African countries remains structurally rigid and specifically raw commodity-based, leaving their economies vulnerable to external factors and limiting their overall business competitiveness.
Moreover, challenges persist in infrastructure development and business environment across the continent.
Zambia, for instance, grapples with poor infrastructure, weak protection of property rights, and high costs of doing business, impeding its progress and growth potential.
South Africa’s problems entail: addressing the persistent manifestations of the architecture of colonisation and apartheid, the constitutional imperative (to correct the wrongs of the past), the expression of the constitutional promise (an ongoing national endeavour), the accidental evolution of the national business architecture (Eskom, Iscor, Sasol, SAA, Dene), the structural design of the workplace dynamics (job reservation policies, mining industry practices), and the structural exclusion of black business.
The national problem statement execution paralysis for South Africa focuses on three pillars on redress – BEE, employment equity and public procurement.
Solutions
To address these challenges, experts emphasise the importance of strategic public investments with a strong emphasis on policy certainty to attract FDIs to stimulate supply-side responses in non-critical economic sectors, infrastructure development and human capital.
By diversifying economic activities and reducing dependence on foreign expertise, African countries can strengthen their long-term competitiveness and resilience.
In addition, ensuring fiscal discipline over oil revenues is crucial for sustainable economic development.
This approach allows for prudent management of resources, while simultaneously addressing pressing issues such as unemployment, poverty eradication, healthcare improvements, food security, and the fight against corruption.
By adopting such measures, African nations can lay the foundation for a more inclusive and prosperous future.
‘Crucial’
The augmentation of domestic capital and the enhancement of efficiency through the transfer of new technology, innovation, and best practices is crucial.
FDI has both benefits and costs, and its impact is determined by the country’s specific conditions in general and the policy environment in particular.
This is in terms of the ability to diversify, the level of absorption capacity, the targeting of FDI, and the various opportunities for linkages between FDI and domestic investment.
The global economic climate remains unstable, leaving small and open economies facing unfavourable economic conditions. The economies have been experiencing a slowdown in growth, mounting debt, and fiscal imbalances.
Adequate policy measures must be implemented to dampen these unhealthy trends, that is, policies be adopted that promote innovation, productivity growth, competitiveness, and investment.
Impact
FDI and the discovery of oil will positively impact growth when host country conditions are adequate.
The impact will not be significant when considered in isolation and can be negative overall if the inadequacies of the absorptive capacity persist.
Foreign investment projects usually boost demand for energy and modern telecommunications, road, and transport systems. These developments, especially those related to telecommunications, transport, and energy, increase productivity and efficiency, leading to a rise in output.
Therefore, policies that seek to improve infrastructure could ultimately lead to sustainable development and a higher standard of living for residents.
Efforts in the domestic economy should be made to invest in research and development.
This will assist with building the manufacturing base and improving technology for the country.
The industrialisation by invitation strategy proposed by Lewis (1950) is still valid today, and should be explored in Namibia.
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