FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly
The resilience of foreign direct investment during financial crises may lead many developing countries to regard it as the private capital inflow of choice. Although there is substantial evidence that such investment benefits host countries, they should assess its potential impact carefully and realistically
Economists tend to favor the free flow of capital across national borders because it allows capital to seek out the highest rate of return. Unrestricted capital flows may also offer several other advantages. First, international flows of capital reduce the risk faced by owners of capital by allowing them to diversify their lending and investment. Second, the global integration of capital markets can contribute to the spread of best practices in corporate governance, accounting rules, and legal traditions. Third, the global mobility of capital limits the ability of governments to pursue bad policies.
In addition to these advantages, which in principle apply to all kinds of private capital inflows,the gains to host countries from Foreign Direct Investment (FDI) can take several other forms:
• FDI allows the transfer of technology—particularly in the form of new varieties of capital inputs—that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market.
• Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country.
• Profits generated by FDI contribute to corporate tax revenues in the host country.
Foreign Direct Investment ( FDI) versus other flows
Despite the strong theoretical case for the advantages of free capital flows, the conventional wisdom now seems to be that many private capital flows pose countervailing risks. many host countries, even when they are in favor of capital inflows, view international debt flows, especially of the short-term variety, as "bad cholestero.
In contrast, FDI is viewed as "good cholesterol" because it can confer the benefits enumerated earlier. An additional benefit is that FDI is thought to be "bolted down and cannot leave so easily at the first sign of trouble." Unlike short-term debt, direct investments in a country are immediately repriced in the event of a crisis.
Recent evidence
To what extent is there empirical support for such claims of the beneficial impact of Foreign Direct Investment?
A comprehensive study by Bosworth and Collins (1999) provides evidence on the effect of capital inflows on domestic investment for 58 developing countries during 1978-95. The sample covers nearly all of Latin America and Asia, as well as many countries in Africa. The authors distinguish among three types of inflows: Foreign Direct Investment, portfolio investment, and other financial flows (primarily bank loans).
Countries should concentrate on improving the environment for investment and the functioning of markets. They are likely to be rewarded with increasingly efficient overall investment as well as with more capital inflows." Although it is very likely that FDI is higher, as a share of capital inflows, where domestic policies and institutions are weak, this cannot be regarded as a criticism of Foreign Direct Investment per se. Indeed, without it, the host countries could well be much poorer.
Fire sales, adverse selection, and leverage. Foreign Direct Investment is not only a transfer of ownership from domestic to foreign residents but also a mechanism that makes it possible for foreign investors to exercise management and control over host country firms—that is, it is a corporate governance mechanism. The transfer of control may not always benefit the host country because of the circumstances under which it occurs, problems of adverse selection, or excessive leverage.
Both economic theory and recent empirical evidence suggest that Foreign Direct Investment has a beneficial impact on developing host countries. But recent work also points to some potential risks: it can be reversed through financial transactions; it can be excessive owing to adverse selection and fire sales; its benefits can be limited by leverage; and a high share of Foreign Direct Investment in a country's total capital inflows may reflect its institutions' weakness rather than their strength. Though the empirical relevance of some of these sources of risk remains to be demonstrated, the potential risks do appear to make a case for taking a nuanced view of the likely effects of Foreign Direct Investment. Policy recommendations for developing countries should focus on improving the investment climate for all kinds of capital, domestic as well as foreign.
Foreign Direct Investment Statistics
Manufacturing sector is an area where investment opportunities exist. Initially developed under the import substitution policy, there has now been a shift to export oriented manufacturing as the thrust of Kenya's industrial policy. The sector plays an important role in adding value to agricultural output and providing forward and backward linkages, hence accelerating overall growth.
The manufacturing sector now comprises of more than 700 established enterprises and employs directly over, 218,000 persons as at the year 2000. A wide range of opportunities for direct and joint-venture investments exist in the manufacturing sector, including agro-processing, manufacture of garments, assembly of automotive components and electronics, plastics, paper, chemicals, pharmaceuticals, metal and engineering products for both domestic and export markets.
Paper Products
Kenya has an integrated pulp paper mill plant producing paper and paper board from renewable forest products. However, the country imports coated white lined chipboard and other boards for packaging, newsprint, printed paper and other types of paper. Investment opportunities exist in the production of paper from other raw materials such as bagasse, sisal waste, straw and waste paper.
Textiles and Apparels
Textile, Garment and Apparel manufacturing has a very high potential in Kenya. The basic raw material inputs such as dyes and chemicals are imported, as are all textile equipment and most spare parts. Investment opportunities exist under the Manufacturing Under Bond scheme and in the Export Processing zones for the production of items such as yarn and garments.
Metal and Engineering Works
Kenya has a basic metal sector making a variety of downstream products from local and imported steel scrap, steel billets and hot rolled coils. Kenya imports steel billets, coils, wire rod and wires, steel plates, sheets, steel scrap and pig iron. The country possesses a broad-based metal products sector with various independent engineering, foundry and metalwork workshops. Opportunities exist in the development of a nucleus foundry making precision castings that are then processed into precision components.
Vehicle Parts and Assembly
The motor vehicle component industry is rapidly developing to supply the needs of a few motor vehicle assemblers to meet certain local content requirements. Opportunities exist for manufacture of components for use by local assemblers for domestic market and for export to regional markets.
Electrical Equipment
Investment potential exists for the production of motors, circuit breakers, transformers, switch gears, irrigation pumps, capacitors, resistors, insulation tapes, electrical fittings and integrated circuit boards for both the domestic and export markets.
Electronics
Although Kenya's electronic industry is still at its infancy, a number of firms in the assembly, testing, repair and maintenance of electronic goods are in operation and are rapidly increasing their scope of activities to meet the growing demands of the industry.
Key opportunities for direct investments, joint-ventures and subcontracting exist in assembly of a wide range of electronic goods in Kenya, especially within the Manufacturing Under Bond scheme and Export Processing Zone Programmes.
These include the production of:
?Consumer electronics, such as colour televisions, Video Cassette Recorders (VCRs), printers, floppy disk drives and Compact Disk Roms (CD-Rs);
?Telecommunication equipment, such as printed circuit boards, and transmission equipment; and
?Support items such as cables, cords, die casting and metal plating.
With a labour force which is well-equipped to meet the labour skill requirements for the industry and the relatively large domestic and export market potential of electronics in the region, Kenya offers an enormous potential for the manufacturing and assembly of electronic items.
Plastics, Chemicals and Pharmaceuticals
The plastics industry in Kenya is well-developed and produces goods made of polyvinyl chloride (PVC), polythylene, polystyrene, and polypropylene. All materials are imported in the form of granules.
A large number of pharmaceutical formulations are produced locally in the form of tablets, syrups, capsules, and injectables, but the bulk of pharmaceuticals is imported. There is room for additional investment in the pharmaceutical industry.
Many attractive investment opportunities in chemicals, pharmaceuticals and fertilizers remain unexploited. These include the production of PVC granules from ethyl alcohol; fomaldehyde from methanol; melanine and urea; mixing and granulating of fertilizers; cuprous oxychloride for coffee bean disease; caustic soda and chlorine based products; carbon black; activated carbon; precipitated calcium carbonate; textile dyestuff; ink for ball-point pens; and gelatine capsules.
Mining and Mineral Products
Opportunities exist in the production of glass as the country is not self-sufficient. A few manufacturing units produce ceramic pottery and tiles, however, substantial quantities of ceramic pottery, tiles, sanitary-ware, and insulators are imported. Investment potential exists in prospecting and mining of other minerals such as gold, precious stones and petroleum.
Wood and Wood Products
Making use of renewable resources, investment opportunities exist for production of high quality and hand carved furniture for export, high density board from saw dust for the domestic market, high quality veneers, wooden toys, sporting goods such as cricket bats and rackets for export, and other specialty items. Recognizing the importance of environmental preservation, the Government pursues an active re-afforestation programme.
Both Heidi Grumm & Robert Muhoho are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Robert Muhoho has sinced written about articles on various topics from Recreation and Sports, Vacation and African Travel. Robert is a tour consultant and co-owner of Landmark Safaris Ltd. A company that has planned business and vacation safaris for over 10,000 tourists in the East and Southern Africa region. For more information please visit:http://www.landmarksafaris.com/pl. Robert Muhoho's top article generates over 12100 views. to your Favourites.
Attila The Hun Death You finish your workout in a very reasonable time. You get on with your life. But more importantly you get the results your want
