Key message 3 – Policies to promote FDI must also seek to get more out of FDI

Attracting FDI does not guarantee economic development. The benefits of FDI and its productivity spillovers depend on the macroeconomic and structural conditions of the host economy (UNCTAD, 2015). Laissez faire policies can hinder the benefits of FDI, leaving economies vulnerable to restrictive business practices, oligopolistic pricing, or transfer pricing to avoid taxes. FDI can be directly harmful when poorly managed, for example, as a result of a deterioration in the balance of payments as profits are repatriated (Lederman et al., 2010).

Harnessing the value of FDI requires active procompetition policies that not only attract FDI, but also encourage economic contributions to technology, labour markets and vertical supply chains (Farole & Winkler, 2014; Chen et al., 2015).

Setting up a Local Content Unit in Mozambique

In collaboration with the relevant government ministry, a Local Content Unit (LCU) can engage in dialogue with MNEs to arrive at an optimal solution for local firm involvement in the industrial supply chain. Through a project led by John Sutton, the IGC supported research in Mozambique that evaluated the scope and design of a LCU as the solution to generating more local jobs in the gas industry. The LCU would be an alternative to local content rules, which are often ineffective. A welldesigned LCU that enjoys the full support of the relevant government ministry could achieve the kind of broad-based involvement of local companies and maximise long-term benefits to the Mozambican economy. Based on the study’s suggestion that an LCU can help develop the capabilities of Mozambican firms, improve their quality of outputs to match international standards and create sustainable, high-skilled jobs, the government launched a scoping study to implement an LCU.

For increased FDI to translate into increased productivity, and ultimately economic growth, will depend upon existing linkages between domestic and foreign firms (Newman et al., 2016). The movement of workers and adoption of technologies and work practices are crucial in generating productivity spillovers. In Africa, in contrast to East Asia, linkages between foreign and domestic manufacturing firms are limited, as multinational enterprises (MNEs) often rely solely on imports for intermediate inputs. Many African MNEs produce wholly for export markets, this reduces the scope for forward linkages (Newman et al., 2015). One way to strengthen linkages is through Local Content Units; these are most appropriate when resource-rich economies are in strong positions to impose conditions. In the case of manufacturing, Investment Promotion Agencies have an important role to play as priority must be given to attracting investors and to efforts to remove any impediments to value chain formation.

Figure 2: Role of domestic institutions in harnessing FDI