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Investment Climate


Investment Climate & Foreign Direct Investment in Africa Emmanuel Nnadozie, Director, EDND & Angelica Njuguna, Economic Consultant United Nations Economic Commission ... – PowerPoint PPT presentation

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Title: Investment Climate

Investment Climate Foreign Direct Investment in
  • Emmanuel Nnadozie, Director, EDND
  • Angelica Njuguna, Economic Consultant
  • United Nations Economic Commission for Africa
  • Addis Ababa, Ethiopia
  • 6th African Economic Conference
  • 25-28 October 2011

Outline of Presentation
  1. Introduction
  2. Patterns and Trends of FDI in Africa
  3. Investment Climate FDI
  4. Business Environment Doing Business Africa
  5. Empirical Model, Data, Results
  6. Conclusions Policy Recommendations

  • The role of FDI
  • Providers of technology management expertise
    link to external market employment and finance
    for development
  • - May lead to structural transformation rapid
    economic development. E.g. Japan NICs

  • Developed countries are the preferred
    destination of FDI
  • Over 50 of worlds shares go to developed

Worlds FDI Inflows, 2009
  • Distribution of FDI inflows among the
    developing countries are uneven.
  • FDI in Africa remains small and lowest

Distribution of FDI, Developing Regions, 1970-2009
FDI in Africa
  • Concentrated in few countries mostly with
    natural resources
  • 60 go to 5 countries (Angola, Egypt, South
    Africa, Nigeria Libya)
  • 79 go to 10 countries
  • 92 go to 20 countries
  • 8 go to remaining 33 countries

Top 10 countries main FDI destination
  • Belong to middle income countries
  • Main FDI to 6 countries is in mining quarrying
    (oil/hydrocarbon sector)
  • Main exports of these 6 countries are petroleum
    petroleum products ranging from 47 to 97 of
    total exports
  • However, Egypt, South Africa, Morocco
    Tunisias exports are more diversified to other

Policy Questions
  • If the main driver of FDI in Africa is the
    natural resource endowment.
  • What is the chance of a poor, less-endowned
    African country to attract FDI?
  • What do African governments do to obtain more
    FDI if it is believed to help in economic

Investment Climate FDI
  • A growing consensus in literature believed that
    domestic investment climate matters to attact
  • Investment Climate refers
  • Foreign investment regime
  • General investment environment

Investment Climate FDI
  • Different studies used broad indicators to
    describe investment climate (sound economic
    political conditions, infrastructure, financial
    development, etc.)
  • However, the consensus is investment climate
    constraints negatively influence FDI inflows.

Reforms business environment
  • African economists policy makers believe in a
    friendly business environment
  • E.g. Uganda attacks FDI due to its predictable
    investment climate
  • Governments institute reforms to improve their
    business environment reduce taxation
    privatization governance reforms (APRM)
    stabilization of macroeconomic environment

Business Regulations Ease of doing Business
  • Fundamental premise of doing business is that
    economic activity requires good rules
  • In 2003, the World Bank introduced ranking of
    countries according to the ease of doing
    business index.
  • Index indicates that the lower its value the
    easier it is to do a business in a particular

Which indicators make up the ranking?
  • Starting a business
  • procedure, time, cost and paid-in minimum capital
    to open a new business
  • Dealing with construction permits
  • procedures, time and cost to obtain construction
    permits, inspections and utility connections
  • Employing workers
  • Difficulty of hiring index, rigidity of hours
    index, difficulty of redundancy index, redundancy

Which indicators make up the ranking?
  • Registering property
  • Procedures, time and cost to transfer commercial
    real estate
  • Getting credit
  • Strength of legal rights index, depth of credit
    info index
  • Protecting investors
  • Strength of investor protection index extent of
    disclosure index, extent of director liability
    index and ease of share holder suits index

Which indicators make up the ranking?
  • Paying taxes
  • Number of tax payments, time to prepare and file
    tax returns and to pay taxes, total taxes as a
    share of profit before all taxes borne
  • Trading across borders
  • Documents, time and cost to export and import
  • Enforcing contracts
  • Procedures, time and cost to resolve a commercial
  • Closing a business
  • Recovery rate in bankruptcy

Ease of doing business ranking
  • Region Ave. Ranking
  • OECD 30
  • East Asia Pacific 83
  • Middle East N Africa 92
  • Latin America Caribbean 95
  • South Asia 118
  • Sub-Saharan Africa 139
  • Source WB 2010

Doing Business in 20 most favored-FDI countries
  • 14/20 countries favorite FDI destinations have
    rank better than 139 (African average).
  • South Africa, Namibia, Tunisia, Zambia Ghana
    made it to top 100 countries (out of 183)

Doing Business in 20 most favored-FDI countries
  • Doing business is easier compared to average
    African country, in many stages of business life
  • starting a business takes less days/procedures
  • registration of properties takes less
  • Easier access to credit
  • Trading across border is cheaper
  • Lower taxes
  • Higher recovery rate of investments

Why is it important to do this study?
  • There is a perception that FDI in Africa is
    mainly driven by natural resource endowment.
  • Since natural resource endowment is exogenous
    variable, resource-poor countries have small
    chance to attract FDI.
  • FDIs in extracting industries have limited
    linkages to other sector of the economy.
  • Reforms to improve business environment/regulation
    s is a costly exercise and therefore, is it
    really worth it?

Empirical Model
  • Theoretical framework was based on the behavior
    of a rational economic agent, where firms main
    objective is to maximize profit
  • i.e. Foreign investors invest in another country
    due to profit or return to investment, which is a
    function of total cost and quantity produced.
  • ? minimizing total cost of doing business or
    maximizing profit for FDI looks for favorable
    investment climate.

Empirical Model
  • FDI F (policy variables, economic variables,
  • governance/political variables,
  • others e.g. structural variables)

  • Two sets of data from World Bank
  • CPIA country policy and institutional
  • Macroeconomic ratings
  • Transparency ratings
  • Business ratings

  • (2) Ease of doing Business Index average of
    countrys rankings on the 10 topics presented
    earlier. This is to represent business
  • plus population, oil production dummy
  • education
  • inflation, GDP per capita
  • openness
  • transparency index

Regression Results using CPIA Data
Dependent variable FDI Dependent variable FDI Dependent variable FDI Dependent variable FDI
Variable Regression 1 Coefficients Regression 2 Coefficients
Constant Business Rating Macro Rating Tranparency Rating Oil_production Dummy GDP -463.09 (-9.01) 69.43 (6.91) 76.81 (6.95) 51.73 (2.86) 653.21 (13.53) .. -46.35 (-1.82) 11.42 (2.02) -14.01 (-3.06) 11.76 (0.78) 231.41 (4.08) 0.06 (12.67)
Adj R2 N 38 countries Total panel 152 observations 0.14 0.53
Panel data estimation with Ease of doing Business
Dependent variable FDI Dependent variable FDI Dependent variable FDI
Variable Regression 1 Coefficients Regression 2 Coefficients
Constant Ease of doing business Inflation Population Openness Oil_dummy Transparency ratings 275.02 (1.31) -2.71 (-2.45) -33.78 (-4.69) 31.03 (8.56) 1.39 (1.68) 845.25 (3.87) .. -195.16 (-0.49) -4.06 (-2.71) -45.61 (-3.78) 27.54 (6.36) 3.50 (1.94) 361.06 (1.58) 207.33 (2.74)
Adj R2 No of countries Total panel obs. 0.61 35 70 0.75 25 50
Conclusions Policy Implications
  • Reiterate that structural, economic, political
    and policy variables matter
  • Business reforms regulations matters
  • Countries in Africa that are not endowed with
    abundant natural resources can still attract FDI
  • African countries should not only improve
    economic and political for business but also on
    policies and business reforms and regulations.

  • Thank you
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