The private sector and foreign direct investment

In the past, many sub-Saharan Africa governments have made poor economic decisions that have exploded into dire poverty and poor health conditions throughout the region. Foreign Direct Investment (FDI) targeted at emerging nations has not been directed at sub-Saharan Africa. Additionally, as The World Bank reported, international aid to sub-Saharan Africa has diminished within the last decade.
The lack of FDI, diminished overseas development assistance, and the uncertainty associated with globalization combine to place sub-Saharan Africa economies in a challenging situation. Globalization may provide the on-ramp for these economies or further widen the gap between North and South.
Creating an enabling environment for a healthy private sector is possible if a nation is committed to achieving a competitive advantage. Specifically, it is vital for sub-Saharan Africa nations to evaluate regional competitive advantages and target those industries along with some of the high technology industries. In selecting industries, governments should factor in the market difficulties experienced by smallholders and small firms in the various growth strategies especially since 70 to 80 percent of the population falls in this category. Success depends on sufficient domestic consumption of these goods followed by a strong export market.
Assuming that value-added agriculture is a targeted industry, governments can improve the competitive nature of the sector through several actions. Education is primary when upgrading production factors, along with transparent and seamless market information and infrastructure investments. Strategic partnerships with industry on these factors, along with creating domestic consumption, are vital.
Sub-Saharan African governments realize that agricultural research and development firms will not locate in the region. To reach the next level of value-added products, scarce resources will need to be committed to publicly-sponsored research and development activity. In agriculture, this investment means that partnerships with multinational firms must be negotiated such that the innovations can be re-engineered or adapted legally to regional crops, animals, or machines.
This strategy is a slow process, but over time, innovative activities attract additional innovative firms, and eventually a sizeable talented pool of researchers will generate new markets within and outside the region. Agricultural, trade, and development assistance policies contribute to the investment behavior of agribusiness firms. In today’s globalization era, however, agribusiness firms compete for financial capital against firms in industries that have historically looked beyond industry-specific policies for opportunities. The expanded public policy set includes corporate tax policies.
Tax expenses — the amount and payment timing — can be instrumental in determining the value of any investment. Desai and Hines shows that tax policy, targeting foreign tax credits, for example, can determine the investment value and entry mode of cross-border investments. The lower a country’s tax rates, the more likely that U.S. multinational investors will use a financial capital structure that is higher in debt and pay more royalties to their U.S. parent firm. This capital structure focuses on short-term, extractive opportunities in high GDP growth, high research and development intensity countries — characteristics not present in sub-Saharan Africa emerging market countries.
A fine line separates fostering growth and creating white elephants. The current economic predicament of sub-Saharan Africa countries is unprecedented and hardly fits any modern models of development. In the past, sub-Saharan Africa public policy was heavily involved in private industry and has fostered insulated, dependent, and non-competitive firms. This time around, governments can encourage domestic rivalry to influence sophisticated supply and demand.
In addition to national policy, worldwide leadership is crucial for these governments to negotiate future trade terms. Worldwide reduction of tariff barriers has dramatically increased world trade in fresh and processed agricultural commodities. Today, producers and processors around the world are in direct competition with one another. The globalization of food and agribusiness has begun to shift the standard setting and enforcement processes to international agencies such as the World Trade Organization (WTO), the International Organisation for Standardization and the Organization of Economic Cooperation and Development.
Harmonizing standards to transcend national borders will be a central feature of the food and agriculture system for the foreseeable future. Sub-Saharan Africa should focus on efforts to determine the details of these agreements and how they can help the region to improve conditions for all producers regardless of their size and increase exports.