Foreign Direct Investment (FDI) is where an individual or business from one nation, invests in another. This could be to start a new business or invest in an existing foreign owned business. For instance, Mr Shin, from China, has $1 million and wants to start a new company in Zimbabwe. He invests this, creating a new clothing manufacturing firm in the country. This would classify as a FDI.
However, the definition is slightly different when it comes to investing in a foreign company's assets. According to the IMF, a foreign direct investment is where the investor purchases over a 10 percent stake in the company.
Most Zimbabweans have a very limited understanding of what it is. The subject of foreign investment has many facets and structures. One must make a distinction between FDI and foreign indirect investments (FIIs). FIIs 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.
One must be cognisant of the fact that it is corporate entities not governments that engage in FDI activities and as such, the primary business of a foreign investor is to make money or realise return on investment. As a rule, FDI does not create an economy, but augments a host nation’s economy.
Some of the key features an investor looks for in a host country include strategic location, access to rapidly expanding markets, highly developed physical infrastructure, stable and reliable regulatory infrastructure, skilled man power, low labour costs, low tax rates, political stability, a high level of if not unrestricted financial autonomy and access to capital, open economy, etc.
Types of Foreign Direct Investment (FDI)
This is a form of Foreign Direct Investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create long-term jobs in the foreign country by hiring new employees.
Also known as cross-border merger and acquisition. The purchasing of an existing production or business facility by companies or enterprises for the purpose of starting a new product or service. This type of investment does not involve the new construction of plant operation facilities.
Horizontal FDI is where funds are invested abroad in the same industry. In other words, a business invests in a foreign firm that produces similar goods. For instance BMW, a Germany based firm, may purchase Quest Motors, a Zimbabwean based firm. They are both in the automobile industry and therefore would be classified as a form of horizontal FDI.
Vertical FDI is where an investment is made within the supply chain, but not directly in the same industry. In other words, a business invests in a foreign firm that it may supply or sell too. For instance, Hersheys, a US chocolate manufacturer, may look to invest in cocoa producers in Brazil. This is known as backwards vertical integration because the firm is purchasing a supplier, or potential supplier, in the supply chain.
A conglomerate type of foreign direct investment is one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country. For instance, Implats, an SA mining conglomerate, may invest in Delta Corporation, a Zimbabwean beverages manufacturer. Since this type of investment involves entering an industry the investor has no previous experience in, it often takes the form of a joint venture with a foreign company already operating in the industry.
Benefits of Foreign Direct Investment
Boost to International Trade
Foreign direct investment promotes international trade as it allows production to flow to parts of the world which are more cost effective. For instance, Apple was able to conduct FDI into China to assist with the manufacturing of its products.
However, many of the components are also shipped in from elsewhere, generally from the region of Asia. For instance, the camera is made by Sony, which sources its manufacturing in Taiwan. There is also the case of the flash memory, which is sourced by Toshiba in Japan. We also have the touch ID sensor which is made in Taiwan, and the chipsets and processors, which are made by Samsung in South Korea and Taiwan.
These are but a small handful of the components, but demonstrate how inter-connected the supply chain has become between countries. Both Samsung And Song have conducted investment in the likes of Taiwan, China, and Japan. As a result, it has created new jobs in the region and boosted trade between the nations.
Reduced Regional and Global Tensions
As we have seen with the Apple example, a supply chain is created between countries. In part, this is created by the division of labor. For instance, South Korea may make the batteries, Taiwan the ID sensors, and Japan the cameras. As a result, they are all dependent on each other.
If there is a revolt in Taiwan, the whole process could fall apart. Without the ID sensors, the final product cannot be made, so the need for other components is also reduced. This means workers in Japan and South Korea are also affected.
As a result of this interconnected supply chain, it is in the interest of all parties to ensure the stability of its trading partners. So FDI can create a level of dependency between countries, which in turn can create a level of peace. To use a famous metaphor, you don’t bite the hand that feeds you. In other words, if nations are reliant on each other for their income, then the likelihood of war is also reduced.
Sharing of Technology, Knowledge, and Culture
Foreign direct investment allows the transfer of technology, knowledge, and culture. For instance, when a firm from the US invests in another from India, it has a say in how the firm is run. It is in its interest to ensure the most efficient use of its resources.
From the businesses perspective, foreign direct investment reduces risk through diversification. By investing in other nations, it spreads the companies exposure. In other words, it is not so reliant on Country A. For instance, Target derives its entire revenues from the US. Should an economic recession hit Stateside, it’s almost guaranteed to harm its profits.
Lower Costs and Increased Efficiency
Foreign direct investments can benefit from lower labor costs. Often, businesses will off-shore production to nations abroad that offer cheaper labor. Now there is an ethical element to this than is often debated, but we will leave that aside for now. Whether it is ethical or not is irrelevant as it is a benefit to the business.
Although labor costs are lower, we must also consider productivity. For instance, one person in China may produce one unit for $1 an hour. However, an employee in the US may be able to produce 20 units for $10 an hour. So whilst a Chinese employee is cheaper, they only make 1 unit per $1, compared to 2 units per $1 in the US.
Reduced levels of corporation tax can save big businesses billions each and every year. This is why big firms such as Apple use sophisticated techniques to off-shore money in international subsidiaries.
Countries with lower tax regimes are usually those that are favoured. Examples include Switzerland, Monaco, and Ireland, among others. Furthermore, there are also tax incentives by which the foreign government offers tax breaks to investors in a bid to encourage FDI.
Employment and Economic Boost
When money is invested in another country, it creates jobs, new companies, and new factories/buildings. This brings about new opportunities for local residents and can stimulate further growth.
Challenges facing Zimbabwe in attracting FDI
Investor optimism following the November 2017 fall of the late former President Robert Mugabe has weakened as President Emmerson Mnangagwa’s government has been slow to follow through on reforms to improve the ease of doing business, and a protracted currency crisis strains the economy. The Transitional Stabilisation Programme, announced in 2018, includes structural and fiscal reforms that, if fully implemented, would resolve many of the economy’s fundamental weaknesses.
The new government did move quickly to amend the restrictive indigenization (local ownership) law to apply only to the diamond and platinum sectors, opening other sectors to unrestricted foreign ownership. Nevertheless, investors remain cautious. Zimbabwe has attracted low investment inflows of less than USD500 million annually over the past decade. Between 2014 and 2017, foreign direct investment inflows fell from USD545 million to USD289 million, but rose to approximately USD470 million in 2018. The government announced its commitment to improving transparency, streamlining business regulations, and removing corruption, but the last two years have brought only modest progress.
Foreign Direct Investment Statistics
Foreign direct investment, net inflows (% of GDP) in Zimbabwe was reported at 3.0629 % in 2018, according to the World Bank collection of development indicators, compiled from officially recognized sources. Zimbabwe - Foreign direct investment, net inflows (% of GDP) - actual values, historical data, forecasts and projections were sourced from the World Bank on August of 2020.
Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows net inflows (new investment inflows less disinvestment) in the reporting economy from foreign investors, and is divided by GDP.
|Foreign Direct Investment||2017||2018||2019|
|FDI Inward Flow (million USD)||349||745||280|
|FDI Stock (million USD)||4,688||5,433||5,713|
|Number of Greenfield Investments||7||18||17|
|Value of Greenfield Investments (million USD)||415||6,114||709|
According to a Reserve Bank of Zimbabwe report Foreign Investment sharply fell by 31% by October 2020.
What to consider when investing in Zimbabwe
Zimbabwe's strong points in terms of attracting FDI include:
- abundant mineral resources (platinum, gold, diamond, nickel);
- agricultural wealth (maize, tobacco, cotton);
- potential for tourism development;
- membership of the Southern African Development Community (SADC);
- normalisation of relations with the international community.
The factors hindering foreign investment in Zimbabwe include:
- economic and financial situation hit by a long period of hyperinflation;
- shortage of cash;
- under-investment in infrastructures (especially energy infrastructure);
- precarious food and health situation: the majority of the population depends on international aid;
- AIDS prevalence rate among the highest in Africa and in the world.
Government Measures to Motivate or Restrict FDI
While the government of Zimbabwe has implemented since 2009 a number of measures designed to attract foreign direct investment (FDI), many of its macroeconomic policies, such as the indigenization and economic empowerment laws, acted as significant deterrents. Following recent political changes, the new government amended indigenization, or local ownership laws, to reduce the restriction to only the diamond and platinum sectors; other sectors are now open to unrestricted foreign ownership. Moreover the government has announced its commitment to improving transparency and removing corruption.
Zimbabwe’s incentives to attract FDI include tax breaks for new investment by foreign and domestic companies and allowing capital expenditures on new factories, machinery, and improvements to be fully tax deductible. The government also waives import taxes and surtaxes on capital equipment. Tax inventives may be obtain in certain sectors such as pharmaceuticals, energy, construction, agriculture and mining.
- Geoffrey Makina, , Zimbabwe Independent, Published: 7 June, 2019, Accessed: 12 August, 2020
- Paul Boyce, , BoyceWire, Published: 18 July, 2020, Accessed: 12 August, 2020
- , U.S. Department of State, Accessed: 12 August, 2020
- , Trading Economics, Accessed: 12 August, 2020
- , Lloyds Bank, Accessed: 12 August, 2020