Attempts to tie foreign direct investment (FDI) to development objectives are falling away across the world as competition for FDI intensifies, a United Nations study has indicated.
The research, by the UN Conference on Trade and Development (Unctad), shows that middle-income countries have been forced to relax their imposition of performance requirements on FDI, either by making them voluntary rather than mandatory or scrapping them altogether.
The study assesses the impact of five types of performance requirements in South Africa, Chile, India and Malaysia. Although the evidence is mixed, there is a definite trend towards less stringent performance requirements.
The report defines performance requirements as “stipulations, imposed on investors, requiring them to meet certain specified goals with respect to their operations in the host country”.
Examples range from insisting on a minimum level of domestic equity participation, as in South Africa’s black economic empowerment (BEE) charters, to investment in research and development and technological and skills transfer.
Generally, the requirements seek to ensure a mutually desirable outcome for both host country and investor, usually a multinational corporation. The measures can, for instance, be used to correct market failure or inefficient supply of goods or services and to redistribute income.
They can also be imposed with the aim of promoting regional integration, avoiding restrictive business practices and strengthening the industrial base.
But the Unctad report contains a warning that will please critics of BEE in South Africa — gains in redistribution [of income] “sometimes benefit small but well- organised groups in society at the expense of the larger public.”
In addition, it points out that in a bid to be more attractive to foreign investors, many countries have softened or removed performance criteria.
A study by the European Round Table of more than 20 developing countries bears testimony to this. The study found that between 1992 and 1999 all had decreased their performance requirement. Ranked from zero to six, with an ascending degree of enforced performance requirements, countries like Nigeria have moved from three to zero, while even China has fallen slightly from four to 3,5. On average, the decrease was from 1,61 to 0,82.
The study argues that apart from increased competition for FDI inflows, the need to comply with international commitments, regional integration, the requirements of higher levels of development and the ineffectiveness of measures were also reasons for the declining influence of performance requirements.
Unctad notes that countries that are best placed to bargain are those where the foreign investor seeks access to a local market, rather than merely to use the country as a base for exports. Possession of a scarce resource, particularly strategic minerals, also strengthens the hand of national governments.
South Africa’s most successful application of performance requirement has been the Motor Industry Development Programme. In addition to driving export growth, this aims to improve international competitiveness, enhance vehicle affordability in real terms and increase the industry’s trade balance. It success in these areas led to its extension to 2012, yet criticism persists that it has failed to create jobs.
Apart from export performance requirements, South Africa has technology transfer requirements in the form of foreign investment grants, a scheme launched in September 2000. The grants are given to firms that import new equipment.
Eighteen months after they were introduced, 44 companies with a total investment of R700-million had made use of them. However, Department of Trade and Industry officials said the scheme had been only partially successful.
Another South African industry where requirements have been imposed is the electronic media. The industry is subject to a requirement that not more than 20% of ownership should be in foreign hands, resulting in the dominance of local owners. Yet in a review currently underway, industry players have called on the Independent Communications Authority of South Africa to increase foreign ownership levels to 35%.
India is cited as a country that has extensively used performance requirements, including domestic equity participation. The country recently scrapped local content requirements for its automobile industry.
The report notes that Chile, which has relatively few performance requirements, has succeeded in attracting large amounts of FDI since the 1980s because of its natural resources and liberal investment regime.
Its export performance requirement appears to have encouraged a greater number of firms to export. However, its local content requirement, in place since 1999, has not been effective.