By Louis T. Wells, Professor of International Management,
Harvard Graduate
School of Business Administration
African countries that have undertaken reforms to make themselves more attractive to foreign investment must be ready to launch campaigns to publicize their advantages and seek out prospective investors, says Louis T. Wells of the Harvard Business School. These promotional efforts are not cheap and are not easy. An effective approach, says Wells, would be for several countries to pool their resources to publicize their attractions and to develop common investment policies. They should also learn strategies to avoid, such as reliance on tax incentives and general investment missions, which are usually ineffective, he says.
Experience suggests that economic reform alone will not attract foreign investors to Africa. Reform generally has to be accompanied by an active marketing or investment promotion program designed to "sell" the opportunity of the African marketplace. Successful investment promotion can be expensive and must be carefully targeted to be effective. Like-minded African countries should consider joint promotion programs -- focusing on image-building activities. In these joint efforts countries would not only share the costs of changing investors' perceptions; they would also make commitments to a standard set of reforms and agree to common policies toward investment.
Some caution is in order. The prospects for large amounts of foreign investment flowing into Africa are frequently oversold. Africa's share of total developing world investment has been declining for some years. Since their markets are relatively small and they do not border rich nations, African countries are unlikely to attract foreign investment in volumes that will have a major impact on total capital formation -- at least in the near future. The exceptions may be the countries with mineral or other natural resources. On the other hand, the benefits of the foreign investment that does come may be disproportional to what is implied by the overall figures. For example, foreign investment in export manufacturing can encourage local firms to export, and foreign management can increase the efficiency of formerly state-run enterprises. More important, even if less foreign investment is forthcoming than would be desirable, reform efforts directed at attracting foreign investment are the same kinds of reforms that stimulate domestic investment.
A government needs to decide what kinds of investors are desired and are likely to be attracted to a country. When government officials think about foreign investment, they often have in mind investors that will manufacture for the domestic market. The foreign-owned breweries, battery makers, cement producers, and refiners spread across Africa illustrate this type of investor. Obviously, these investors are interested in the size of the local market. Especially attractive to governments is the foreign investor who will manufacture for export markets. Due to global competition, however, export manufacturing industries can be especially difficult to attract to a country that does not have a reputation for such industries. Africa has had considerable experience with a third type of foreign investor -- those that come to extract a raw material or to grow plantation crops.
INVESTMENT STRATEGIES TO AVOID
The experiences of Asian and some Latin American countries in attracting foreign investment offer some important lessons to African countries about which strategies to avoid.
Tax Incentives Are Usually Ineffective. On the policy side, the most common mistake a country can make is to rely on tax incentives -- particularly tax holidays -- to attract foreign investment. Several studies have shown that tax incentives are almost totally ineffective in attracting investment for the domestic market and have only a small impact on export manufacturers. Reduced rates of taxation may be necessary if a country's corporate tax rate is excessively high, but it is better to reduce the general rate than to introduce a system of incentives.
Creating Ineffective One-Stop Shops. Many countries eager to attract foreign investment have created "one-stop shops" -- agencies charged with issuing all the permits required for a foreign investor or with assisting the investor in obtaining those permits from other authorities. Despite governments' good intentions, in the vast majority of cases the agencies have quickly become just another barrier to foreign investment. Without the solid backing of the country's top leaders, one-stop shops quickly lose their ability to issue permits that will be honored by the implementing agencies, and investors find it better to negotiate directly with the responsible agencies.
Marketing a Country Too Early. Several countries have begun their investment promotion efforts before reforms were complete and policies stable. Promoting too early is not only a waste of money; it is likely to be damaging. If a country touts its reforms before they are complete, would-be investors who investigate and find the environment still unattractive are unlikely to take a second look. Certain promotion steps can be safely initiated early in the process. Servicing investors already in the country is helpful in determining whether reforms have really taken root and in identifying policies that need to be revised or reforms that should be undertaken.
Faulty Mixes of Promotion Tools. Research has shown that image-building alone -- advertising and general investment missions -- very rarely leads to investment. At best it serves to convey to potential investors changes in policies and general impressions of a country. For instance, potential investors -- especially outside the raw material industries -- tend to lump African countries together. They assume that civil unrest is more widespread than it actually is and that most African countries have backed off from reform. In the case of African countries that have implemented reforms, image-building activities are appropriate for correcting investors' misperceptions. However, these must be followed by "investment-generating" activities.
Governments find it especially difficult to organize investment-generating activities, especially personal selling. To be effective, government officials must choose firms that are likely to invest in the country and must deliver carefully prepared presentations to company managers. Few bureaucrats are equipped with the communication skills, business knowledge, confidence, and initiative for such activities. In addition, governments usually do not devote enough resources to servicing both existing and prospective investors -- arranging schedules for investors' visits, meeting them at the airport, accompanying them through the entry formalities, providing guides, and helping them obtain the needed permits and licenses.
Failing to Target. One of the common mistakes of promotion efforts is the failure to target particular investors. Promotion efforts are expensive, so they should be aimed at investors who are desired and who are likely to have an interest in the country. Targeting requires considerable skill, and sometimes the help of outsiders. Often ideas for potential investors can come from the experiences of similar countries. Targeting should be done not only by industry but also according to the investors' size and home country. The best choices are not always obvious.
Relying on Embassies for Promotion. Several countries have relied on their embassies and consulates abroad to promote foreign investment. They believe that because they already have a presence abroad, there is no need to establish additional facilities. The results of this practice have been dismal. Embassies and consulates are staffed by people whose careers are based on diplomacy, not on business. Generally, they do not have the skills or the inclination -- nor do they receive rewards -- for contacting foreign businesses. They may provide investment literature when asked, but they are almost never aggressive in seeking out investors.
Preparing Feasibility Studies. A number of countries have devoted manpower to preparing feasibility studies for potential investors. In the vast majority of cases, these have been wasted efforts. Private investors rarely place much confidence in business proposals put together by governments. An exception is the financial investment firms that invest in Africa. These firms are likely to be run by members of the African Diaspora and may be of special importance for some African countries. The best approach, however, is to introduce such financial investment firms to local business people who have business proposals.
THE NEED TO POOL RESOURCES
The first stage of investment promotion -- image-building -- can be expensive. Many African countries find it impossible to devote sufficient budget resources to changing images and generating investment. A solution is for like-minded African countries to pool their resources in this effort.
An initial group of cooperating countries would comprise nations that have instituted major reforms, have some record of sticking with them, and seek foreign direct investment. To encourage an identity, the group might adopt some name for their common effort -- "Invest Africa," for example. Although the group should be open to new member countries, they should be admitted only after careful consideration of the extent to which they have implemented reforms and improved their investment climate.
Eventually, the group might encourage certain common policies toward foreign investors. For example, terms for mining projects, rules on local participation, and guarantees that earnings and investment can be repatriated might be standardized across the member countries. Common policies would make common promotion easier and more effective.
Image-building by the group would consist of two activities: advertising and general investment missions. Advertising would explain the reforms and the commitments undertaken by the cooperating countries. It would describe investment opportunities and would list the members' common policies toward foreign direct investment. Investment missions would take prospective investors to the cooperating countries for presentations on the investment environment and encourage contacts with local business people.
To be successful, an image-building campaign must be supported with investment-generating activities by the individual cooperating countries. Although the group might have a single designated unit for managers who respond to ads or who want further information, detailed information and personal selling has to come from the member countries themselves. Each must have a skilled investment promotion unit to follow up on leads generated by image-building and eventually to identify firms on its own to contact.
Even groupings of African countries are unlikely to attract as much foreign investment as possible. They need cooperation from countries and multilateral institutions that can provide advice about creating an attractive investment climate. For the heavily indebted countries, debt cancellation by multilateral institutions and temporary balance-of-payments support from outside Africa are essential to make promises of convertibility plausible to prospective investors.
Richer countries can also provide some help in reducing risk for private investors. The U.S. Overseas Private Investment Corporation, the World Bank's Multilateral Investment Guarantee Agency, and similar agencies cover risks of expropriation, inconvertibility of currencies, and civil disturbances. Risk can also be reduced if the governments of the investors' home countries allow losses in African investments to be written off, as incurred, against profits earned elsewhere, including at home.
Finally, visits by high-ranking government officials from investors' home countries to reforming African countries can do more image-building than the advertising of any investment promotion agency. Visits by heads of state are covered in the home country press. This brings the countries to the attention of investors; often the articles describe the outcome of reform efforts. Foreign visits can lead to foreign investment if the image-building is followed by investment-generating activities.
----------
This article is adapted from a longer version that appeared in "Africa and the American Private Sector: Corporate Perspectives on a Growing Relationship," published by the Corporate Council on Africa.
Economic Perspectives
USIA Electronic Journal, Vol. 4, No. 3 August 1999