The significance of host country incentives in attracting foreign direct investment (FDI)

ENGLISH SUMMARY: With diminishing sources of capital over the past two decades, developing countries have increasingly regarded the flow of foreign direct investment (FDI) as their main source of capital for development. In response to this, countries have also liberalised their policies, making their investment climate friendlier to FDI. This has been accompanied by increased competition amongst such countries to attract FDI, resulting in higher investment incentive packages offered by host governments to potential investors. This study aims to analyse the significance of host country incentives in attracting FDI, and consider whether or not these generous incentives benefit only the foreign investors, without any positive spillovers and linkages being created within the domestic economy, as this is usually given as the strongest motivation for offering these generous incentives. The research has used case studies of three diverse countries to compare and contrast their approach to incentive policies: • Lesotho, where no incentives are offered specifically to foreign investors• Namibia, with its export processing zones (EPZ) and • South Africa, which offers industry-specific incentives. The analysis is undertaken on aggregate FDI inflows to these three countries for the period 1998 to 2004. These are then compared to other selected countries from Africa. A further analysis of relative performance of FDI to gross fixed capital formation and GDP has also been undertaken for the same period. A separate analysis of the flow of FDI to Namibia four years before and after the introduction of the EPZ regime is also undertaken, and the results are compared with those of Lesotho and South Africa during the same period. It can be concluded that fiscal incentives have not had a significant impact on aggregate FDI inflow into Namibia, but that industry specific incentives such as those used in South Africa have had a much better impact. The results also show that there has been little evidence that FDI has created positive spillovers and linkages in these economies and therefore that the use of generous incentives may have benefited foreign investors more and accrued costs for the host governments. The study has also shown that, despite the absence of essential determinants of FDI in countries such as Angola i.e. adequate infrastructure, economic stability and good governance, FDI in Africa has been mainly resource seeking; concentrated on resource and in particular petroleum rich countries such as Nigeria, Angola and Equatorial Guinea. This form of FDI creates little or no linkages with the rest of the economy and therefore contributes which means that little contribution is being made to the broader development of the economy of the continent.