Foreign investments stimulate national economic development

10 Jun, 2022 - 00:06 0 Views
Foreign investments stimulate national economic development Dr Keen Mhlanga

eBusiness Weekly

Dr Keen Mhlanga

The investment landscape can be extremely dynamic and ever-evolving. But those who take the time to understand the basic principles and the different asset classes stand to gain significantly over the long haul.

Foreign investment involves capital flows from one country to another, granting the foreign investors extensive ownership stakes in domestic companies and assets.

Foreign investment denotes that foreigners have an active role in management as a part of their investment or an equity stake large enough to enable the foreign investor to influence business strategy.

A modern trend leans toward globalisation, where multinational firms have investments in a variety of countries.

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Foreign investment is largely seen as a catalyst for economic growth in the future. Foreign investments can be made by individuals, but are most often endeavours pursued by companies and corporations with substantial assets looking to expand their reach.

As globalisation increases, more and more companies have branches in countries around the world. For some multinational corporations, opening new manufacturing and production plants in a different country is attractive because of the opportunities for cheaper production and labour costs.

Additionally, these large corporations frequently look to do business with those countries where they will pay the least amount of taxes.

They may do this by relocating their home office or parts of their business to a country that is a tax haven or has favourable tax laws aimed at attracting foreign investors.

Foreign investments can be classified in one of two ways: direct and indirect. Foreign direct investments (FDIs) are the physical investments and purchases made by a company in a foreign country, typically by opening plants and buying buildings, machines, factories, and other equipment in the foreign country.

These types of investments find a far greater deal of favour, as they are generally considered long-term investments and help bolster the foreign country’s economy.

Foreign indirect investments involve corporations, financial institutions, and private investors buying stakes or positions in foreign companies that trade on a foreign stock exchange.

In general, this form of foreign investment is less favourable, as the domestic company can easily sell off their investment very quickly, sometimes within days of the purchase.

This type of investment is also sometimes referred to as a foreign portfolio investment (FPI).

Indirect investments include not only equity instruments such as stocks, but also debt instruments such as bonds. There are two additional types of foreign investments to be considered namely, commercial loans and official flows.

Commercial loans are typically in the form of bank loans that are issued by a domestic bank to businesses in foreign countries or the governments of those countries.

Official flows are a general term that refers to different forms of developmental assistance that developed or developing nations are given by a domestic country. Commercial loans, up until the 1980s, were the largest source of foreign investment throughout developing countries and emerging markets.

Following this period, commercial loan investments plateaued, and direct investments and portfolio investments increased significantly around the globe.

Foreign investments are often made by larger financial institutions hoping to diversify their portfolio or expand operations for one of their current companies internationally. It is often considered a move for scaling purposes or a catalyst to spur in economic growth.

For example, some companies may expand their offices worldwide to reach global talent and connections.

In other cases, some companies may open facilities or operations to capitalise on cheaper labour or production costs offered in specific countries. For textile companies in particular, such as retail production, many factories are located in China and Bangladesh despite sales being focused on North America — such as H&M or Zara – because material and labor are significantly cheaper there; thus, outsourcing would result in higher profitability.

In other cases, some large corporations will prefer to conduct business in countries that have lower tax rates.

In-order to accommodate foreign investments country governments need to ensure support of multilateral development banks is highly guaranteed.

Multilateral development banks are financial institutions that invest in foreign assets in developing countries with the objective to stimulate and stabilize economic activity.

Rather than focusing on profit, multilateral development banks invest in projects to support their respective country’s economic development. An example may be infrastructure investments, such as toll roads or bridges in foreign countries, where the financing is composed of very low to zero interest debt.

By doing so, it creates new industries and opportunities within that area.

For example, the World Bank may decide to invest in a toll road in South Africa with large amounts of debt but with very low interest.

By doing so, the World Bank is not only opening the potential of new trade opportunities for South Africa, but it also enhances transportation activity and increases new job opportunities for the country.

Foreign direct investment (FDI) in developing countries has a bad reputation. In some discussions, it is presented as tantamount to post-colonial exploitation of raw materials and cheap labour.

However, recent data shows that FDI in developing countries increasingly flows to medium and high-skilled manufacturing sectors, involving elevated income levels. The trick is to attract “quality FDI” that links foreign investors into the local host country economy.

Reducing restrictions on FDI provides open, transparent and dependable conditions for all kinds of firms, whether foreign or domestic, including: ease of doing business, access to imports, relatively flexible labour markets and protection of intellectual property rights.

A successful IPA could target suitable foreign investors and could then become the link between them and the domestic economy. On the one side, it should act as a one-stop shop for the requirements investors demand from the host country.

On the other side, it should act as a catalyst in the host’s domestic economy, prompting it to provide top notch infrastructure and ready access to skilled workers, technicians, engineers and managers that may be required to attract such investors.

Moreover, it should engage in after-investment care, acknowledging the demonstration effects from satisfied investors, the potential for reinvestments, and the potential for cluster-development because of follow-up investments.

Every good firm should be built on a strong and precise business model, which is the primary design for the successful operation of any business. Identify the sources of your revenue, client base, and finances.

A good business model proves that a company has the potential to be profitable in the international market by showing how successful it has been in its respective country.

Expanding into international markets is often riskier than investing domestically because of the new variables to contend with including different government regulations and the uncertainty of the markets, in general. International investors tend to be more careful when taking on new investments.

A detailed business model that can preemptively answer international investor’s questions can pay dividends in determining a business’ credibility as an investment.

With a sound business model as a foundation, building a network is the catalyst for growth. In general, it’s difficult for a business to grow without a good network but it’s even more difficult for a business looking to go international. In today’s world, the easy place to start is on the Internet.

Use professional networking sites (like LinkedIn) to find industry leaders and investors within your field to connect.

A strong and honest social media presence that accurately conveys your business can solidify your investment opportunities and is a great (and inexpensive) way to build a good network. Become proficient at understanding what attracts foreign investors to a country by producing and sharing relevant content on your social media profiles.

Remember that you get out what you put in — so being a non-active follower and having an idle social media presence won’t do the job. Merely having a LinkedIn page, for example, doesn’t translate to having a good network. Outside of the digital world, grow your in-person network by attending events and conferences.

Foreign governments encourage international investments by the political stability of a country. A business’s prosperity is based on a government’s favourable legislation and political goodwill.

This includes having (and maintaining) a good transport and infrastructure network to help transport products and raw materials to marketplaces.

Historically, countries that have access to the ocean can easily facilitate investments versus their landlocked counterparts.

Favourable tax rates will also promote investments as investors look for nations with lower corporate taxes. Moreover, a weak exchange rate is ideal for foreign investors because it is cheaper for investors and companies to buy assets.

In the end attracting and accommodating international investors takes a lot of effort and the right strategy but by setting clear and attainable goals, you can take control of your business’s investment attraction strategy.

On the other hand, Government aid and support also acts as a catalyst to an organisation’s strategies to welcome foreign investors.

Dr Keen Mhlanga is the executive chairman of Finking Financial Advisory. He can be contacted on [email protected] com or +263719516766

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