Illusions of the foreign investor
The recent controversial coffee deal has once again highlighted a longstanding obsession by Museveni and his government with the magical foreign investor. There are very good reasons to seek out and secure foreign investment, especially for a poor country with a small economy struggling to leapfrog.
A genuine investor, through an established business and not a shadowy individual, potentially brings three crucial resources to an economy: capital (money), technology, and specialized skills. All three are necessary for productivity, to go from raw materials to any form of product and service, whether semi-finished or finished. In contemporary times, it is the multinational corporation that is the main agent of foreign investment and the transfer of these three resources (capital, technology and skills).
The transfer tends to come from rich countries that have huge pools of investment capital and are vastly endowed with technology, both of which are totally limited in poor countries.
A clear piece of evidence of foreign investment is when a foreign-based company, for example a shoe manufacturer, sets up a processing and production plant in Soroti district. What factors go into making an investment decision for, say, a German company, to set up a shoe factory in Soroti? There are many, of course, but three or four are critical.
Market viability or local purchasing power is often an issue, but suppose production is primarily for export to overseas markets. A key consideration is the availability of sufficient, quality raw materials and the supply of a fairly skilled workforce. Raw materials and labor must be cheap, ie easy to exploit.
The quality of the infrastructure and in particular the cost of energy, electricity being the most critical, are linked to this. Companies have an eye on the bottom line, so they want to incur production costs as low as possible.
The other critical consideration, in fact the most important, is not economic; it’s political – that is, the environment of stability and security in a country. When multinational corporations make investment decisions, they consider the cost of investment – how much they need to invest to get the finished products out – but they also consider the cost of disinvestment. The long-term prospects of a planned investment affect where and when to invest. All other economic factors being equal, it is difficult for a serious investor to put their money in a country where the change of government is uncertain and the possibility of political instability is high, which would probably lead to a premature withdrawal from the company.
There has been a lot of scientific research on this topic and the evidence is readily available. But Museveni and his government continue to chase shadows and believe in their own warped logic in pursuit of the ever-elusive foreign investor. In fact, as a percentage of GDP, foreign investment in Uganda has steadily declined over the years!
No serious investor needs free land to invest. In a larger scheme, land is the least expensive, least worrying factor of production, especially for a large corporation. Better, no serious investor needs the loan guaranteed by the State. Doing this goes against the very essence of investing.
If a company doesn’t have equity or can’t secure its own investment financing, it’s not worth it for an investor to savor. In addition, the granting of tax exemptions and holidays is important for companies concerned with limiting production costs, but it is not the most important consideration that goes into investment decision-making.
From a long-term perspective, chasing the foreign investor is actually not a prudent development strategy for a poor country. Giving sweeteners to attract investors can sometimes work, but it usually tends to fail. You get lousy or actually totally wrong investors, which has really been the story of Museveni’s record on this issue.
The long-term strategy for Uganda is to develop and deepen a healthy and harmonious economic and political environment, which is worth attracting investment. This means that it is the citizens, Ugandans and their government, who have the long-term interest in the country and the economy as the real investors willing to take the investment risk. They are the ones who can make the economy and the country attractive to foreigners. There must be a deliberate strategy of creating a local business and industrial class, investing in local business and forming a pool of skilled labor for value-added production.
The bulk of the work to lift a country out of social backwardness and economic deprivation cannot be done by outsiders, it must necessarily be the business of the locals and their businesses plus the political leaders.
The Ugandan government has remained committed to chasing the elusive foreign investor, but cannot see something as basic but overwhelming as the high cost of credit as a huge impediment to the success of local businesses and value-added production.