Effects of Foreign Investments on Developing States in Africa

Introduction

A close look at the contemporary tendencies in the provision of foreign aid in Africa reveals a deep imbalance since the chief providers of foreign direct investment (FDI) primarily target the extractive industries in the African states. Thus, China alone has invested from about $3,17 million in 2004 to $2,52 billion in 2012 in the extractive industries of South Africa, Zambia, Nigeria, Algeria, and Angola. Due to the extensive liberalization of trade regulations and subsequent increase of FDI, African states have gained comprehensive opportunities to boost their economic development and implement comprehensive poverty relief programs by allocating the necessary funds through the inflow of extractive revenues. However, the far-reaching effects of the foreign domination in the domestic economies tend to generate adverse effects in the host countries. Due to the pursuit of profit maximization strategy, multinational corporations (MNCs) usually focus exclusively on resource extraction, which reduces the possibilities of social mobility for low-income workers and neglects the formation of ties with domestic producers. Therefore, African states should consider the implementation of comprehensive institutional and legislative reforms, aimed at the imposition of compulsory constraints on the power of transnational companies and corruptive authorities in host states as opposed to adopting isolationist policies.

Prevalence of Profit Maximization over Corporate Responsibility

Driven by the imperialist logic of profit maximization, multinational companies predominantly penetrate the extractive industries in the host countries. For example, in Tanzania, Chinese international enterprises have invested huge sums of money in the construction of transport infrastructure, including roads and bridges to improve their access to mining sites. According to the trade agreement between the Chinese and Tanzanian governments, foreign investors have provided funds for upgrading the Central Tanzanian railway to ensure the undisrupted inflow of Chinese products to this state and the nearest neighboring countries, including Rwanda, Burundi, and Uganda. While the development projects may have a positive influence on the national infrastructure, the examples clearly suggest that Chinese companies are primarily interested in improving their access to the domestic markets and natural resources of African states. The recent statistical data reveals that more than 30% of Chinese FDI goes to the extractive industries, especially mining, while such issues as industrial and agricultural modernization remain largely unaddressed. Thus, the presented findings indicate the strong role of logical calculations in Chinese investment decision-making, whereas foreign companies focus on the resource extraction and penetration into African markets.

Meanwhile, despite a seemingly positive correlation between economic growth and the rising amount of foreign investments, the statistical data fails to acknowledge the institutional issues that may hinder the emergence of progressive changes in the host countries. Although the stable inflow of FDI in Africa has led to the creation of new jobs and the overall growth of GDP in the chief recipients of financial aid, the recent findings indicate that the main determinants of economic growth have failed to consider the non-productive factors of industrial growth. While GDP reflects “the monetary value of the total output of goods and services in an economy during a specific period”, the notion largely ignores distribution issues and its implications for the overall welfare of local communities. Moreover, some experts have suggested the replacement of the GDP measurement of economic success with a single model that considers multiple factors, including consumption, leisure, mortality, and inequality, to calculate the real progress in the improvement of living standards. Since the economic activities of MNCs in Africa tend to result in the discouragement of domestic production and the perpetuation of pressing social and economic issues as well as the empowerment of international companies through bribery and blackmail of national governments, the rise of foreign investments seems to produce the increasingly mixed impacts on host economies. The assertion implies that the extensive dependency of developing countries on FDI may have adverse effects on the local communities as well as the overall economic development of African states. The presented evidence strongly necessitates a comprehensive analysis of possible implications of foreign domination in the African extractive industries, including the growing corruption, high rates of unemployment, and lack of industrial progress.

Ruling Elites and Domestic Production

The abovementioned arguments strongly indicate the prominent role of corrupted ruling elites in the perpetuation of economic inequality and the domination of foreign enterprises in the national markets through limiting the access to the resource extraction revenues and the inclusion of high-profile officials. Since 1992, the state elites of Mozambique have predominantly neglected the benefits of foreign investment due to lack of personal interest in the development of strong ties between MNCs and national economy. Thus, President Guebuza had forged the political coalition that was primarily invested in the attraction of resource-seeking foreign aid in the programs that were particularly related to the interests of the ruling elite. Due to the comprehensive state support, FDI targeted only a limited set of industries, including gas, coal, gold, titanium, ilmenite, zircon, rutile, marbles, and a variety of precious stones and metals. The formation of a resource-oriented economy led to the huge disparities in the development of domestic industries, with the energy and execrative sectors occupying the primary position, while agricultural enterprises constituted 30% of national GDP. Arguably, the tendency may result in the prevention of non-extractive enterprises from enjoying the benefits of foreign investments, including the acquisition of progressive ideas, technologies, and production practices.

In addition to excluding local agricultural firms from the participation in the distribution of extraction rents, an insufficient state control over the economic activities of foreign corporations frequently leads to the institutional inability of domestic producers to participate in the global trade. This tendency is generally attributed to lack of technological capacity among small local enterprises to challenge the economic supremacy of MNCs. According to some experts, international corporations tend to transfer predominantly obsolete, inappropriate, and overpriced technologies to the host countries. The primary result of such a phenomenon is the inability of local firms to harness the high potential of foreign investments for spurring the technological modernization in the region. For instance, during the first round of investment projects in Mozambique, a scarce number of local firms could be included into the emerging chains of industrial production due to their overall lack of technological base, professional skills, and the unfamiliarity with the innovative strategies for the manufacture of high-quality products. Thus, domestic producers suffered the consequences of technological backwardness, manifested in the low pace of technology transfer from MNCs to the host countries. Such a tendency led to the imposition of significant limits on the general capacity of domestic producers for skill-building, modernization, and the penetration of global markets.

The limited participation of domestic enterprises in the foreign investment projects largely decreases the possibility of economic growth due to the absence of comprehensive ties between foreign investors and domestic producers. Since transnational companies tend to import the supplementary materials for production instead of procuring supplies in the host countries, local firms have no economic and institutional incentives for investing in the modernization and in-host training programs. Consequently, the domestic companies of African states are unable to accumulate enough market power; hence, they appear trapped in the low-value added stages of production. The evidence strongly indicates the asymmetric tendencies in the accessibility of economic benefits, associated with the inflow of FDI, including technology transfer, skill-building, and the participation in the global value chains. Such a concentration and monopolization of market power in the hands of local elites and foreign companies might significantly contribute to the rise of economic inequality between the rich and poor states due to the intentional perpetuation of economic backwardness in African countries.

Economic Expansion of MNCs and Domestic Labor Market

The limited access to the benefits of foreign investment for domestic producers could largely explain the adverse effects of the resource-based economy on the social mobility of the low-income population in African countries. Despite common beliefs, the extractive FDI have provided an insignificant number of direct job opportunities. The share of the working population in the direct employment constituted 60% in 2011 as compared to 59% in 1991, while the promotion of the resource-driven economies might significantly aggravate the current rates of unemployment in African states. Furthermore, foreign companies created only 400,000 direct jobs between 2003 and 2012 on the African continent, whereas additional 200,000 to 1,2 million indirect jobs were created at linked companies. The statistic clearly indicates that MNCs are not responsible for the small surge of job opportunities due to their overall reluctance to invest in the elimination of unemployment in African states. The overall refusal to hire employees among the local population and ensure the adequate working conditions largely explain lack of correlation between the investment influx and the rise of employment rates on the continent. In Liberia, multinational corporations tend to hire local dwellers only for temporary jobs with low wages, whereas only 15,321 of 372,702 employed Liberians work in the foreign-dominated agricultural, mining as well as forestry and logging sectors. The statistical data clearly suggests that the profit-driven ideology of globalization compels foreign companies to decrease the cost of production at the expense of the economic well-being of local communities. Such a tendency largely explains weak social mobility among local African communities since MNCs are not invested in the skills-building and knowledge transfer to the host countries.

Theoretical Implications of Presented Findings

African states should concentrate on the design of comprehensive strategies for translating the immediate revenues from resource extraction into the improvement of the social and economic well-being of their citizens. A close look at the contemporary trends in the development of resource-oriented African economies indicates a huge potential for these states to replace their closest competitors as the chief exporters of natural resources. Due to the significant growth in the export of almost all commodities, including mineral resources and liquid gas, Africa might surpass the Middle East as the major source of fossil fuels during the next several decades. To harness the enormous potential for the future economic elevation, the governments of African countries should consider the legislative initiatives for fostering the ties between MNCs and local communities as well as the provision of equal access to the state revenues. The imposition of mandatory regulations on the economic activities of transnational corporations may significantly reduce the harmful consequences of the narrow-minded concentration on the development of extractive industries. For instance, the adoption of normative statutes may ensure a fair distribution of rents from resource extraction between the concerned parties, thus contributing to the elimination of economic disparities between the ruling elites and the local population. Moreover, state governments should push MNCs for the creation of job opportunities for the local population and the dissemination of new skills and technological innovations in the host countries. In such a way, African states might succeed in the elimination of corruption among the state officials as well as evoke the sense of responsibility among foreign firms for the social and economic effects of their activities.

Indeed, some leading African exporters of natural resources have recently demonstrated the genuine desire to overcome the ‘resource curse’ by implementing progressive legislation. For instance, the Tanzanian government is currently preoccupied with revising the legal framework for the extraction of minerals, the export of oil and gas, and the inflow of FDI to ensure the transfer of technologies and the facilitation of local content through the implementation of the local content requirements and supplier development programmers. In Mozambique, the government plans the adoption of a new legislation for gas and oil as well as for the improvement of tax regimes. Similarly, the authorities of Uganda have focused on the facilitation of domestic production by putting the priority on the purchase of domestic goods. However, the recent legislative initiatives provide only limited requirements for the ties between FDI and the domestic manufacture while completely neglecting to address the issues of employment and professional training. Although the scope of proposed initiatives is limited, the restrictive provision may lead to meaningful changes.

Specifically, they could result in the formation of the institutional framework for the equal distribution of extractive rents among the ruling elite, MNCs, and domestic producers. Furthermore, the creation of market regulatory agencies might spur the meaningful operational activities of the financial, transport, and telecommunication sectors, while the emergence of the market stabilizing institutions might prevent an economic crisis by monitoring the exchange rates, banking system, and the overall compliance with the budgetary and fiscal rules. Finally, the formation of the market legitimizing institutions in the host countries will ensure the social protection and insurance, fair redistribution, and effective conflict management. The combination of legislative and institutional changes is likely to limit the influence of transnational corporations and the ruling elites on the course of economic and political development of African states. In such a way, the larger portions of social groups will be able to use the benefits of trade globalization and participation in global value chains. The presented evidence strongly suggests that the developing countries of Africa should fight for the attraction of FDI and ensure its beneficial effects on the national economies through the implementation of comprehensive reforms, aimed at regulating the economic activities of foreign firms and limiting the power of their ruling elites.

Conclusion

The domination of MNCs in the host economies has the adverse impacts on the African states since foreign investors tend to concentrate on resource extraction and overly neglect its degrading effects on the social mobility of low-income population as well as the formation of ties with domestic producers. The presented claims indicate a strong necessity for the implementation of the institutional and legislative framework for the regulation of MNCs’ economic activities instead of the adoption of restrictive import policies. The research is based on the comprehensive analysis of contemporary trends in the FDI inflow in Africa as well as the credible facts that largely concur with the conclusion. The further study of the question under discussion may help identify and evaluate how MNCs operate in developing countries as well as the far-reaching effects of foreign domination in the extractive industries of African states.

Related Free Economics Essays