OPEN ECONOMY: FDI and the art of deal-making

06 Sep, 2015 - 00:09 0 Views
OPEN ECONOMY: FDI and the art of deal-making

The Sunday Mail

Foreign Direct Investment can be categorised into the establishing of operations or the acquisition of already existing tangible assets by a foreign based entity.

In the former, which is commonly referred to as Green Field investment, the foreign entity constructs entirely new operational facilities from ground up to start what becomes a fully functional business enterprise.

Perhaps reflective of the current gloom cloaking the global economy, predominant narratives surrounding Green Field investment only serve to amplify the level of risk that is meant to be taken on by the foreign entity.

Green Field demands investment of technological and intellectual property, usually high expenditure on constructing infrastructure, and relatively long-term commitment by the foreign entity.

While other relatively less risky forms of investment involve dealing with individual counterparties at arm’s length, for instance equity investment, Green Field requires the foreign entity to fully submerge itself into being a stakeholder vulnerable to the uncertainties of an entire macro-economic environment.

While there is credence to this risk sensitivity, less emphasis has been placed on the potential for greater returns. Green field investment remains the most financially lucrative and strategically advantageous form of investment by a foreign entity: it stands to win an entirely new demanding consumer market, expand its brand recognition, and more importantly establish its facilities on geographical location surrounded by essential resources such as raw material and human capital.

All this upside elucidates why Green Field is an unrivalled win-win investment proposition between a foreign entity and potential host country.

Like any win-win proposition, Green Field takes on a deal making context. Thus, suitors must have a level of deal making artistry and finesse in their interactions with prospective investors.

I will highlight three general deal making competencies that Zimbabwe can improve on as we seek out Green Field investment.

First understand what you want to gain. A common error that most developing nations are making is focusing on what they are willing to give up for them to access FDI.

As such, in their interactions with foreign investors, developing countries especially tend to interrogate which tax incentives, subsidies, statutory compromises and other details they are willing to give up to lure in investors. This is the wrong perspective to take.

Instead, we can learn from developed nations.

All FDI made in developed nations only takes place in as much as an the investor fits into the economic strategy of that respective nation. That means on our part we should enhance understanding of our own intended economic structure and design.

Right now, in Zimbabwe we need to create a competitive industrial foundation for the future.

That will require initial technology and industrial infrastructure.

Policy makers often verse the need for government spending on capital projects. I think that lacks precision in identifying our needs.

Which industrially competitive projects are we going to spend on? I argue for a strategy of which capital projects are leveraged on the innovation of private industry.

I have two reasons for this.

We do not have sufficient finances to develop huge capital projects of our own without running into unsustainable debt.

More importantly, unlike China, Singapore, USA and Germany, we are not an entrepreneurial state proven to have an eye for industrial conception, nor do we have competitive technical acumen within our public institutions.

To astute observers, it will then make sense why most Government industrial projects in Zimbabwe are either rehabilitation or expansionary of projects of old infrastructure.

At this stage,we want to attract infrastructure that can create an industrial foundation we can stand on for years to come.

This can be done through Green Field investment.

Secondly, market the deal. It is unjustified that we often complain about negative perceptions given about Zimbabwe. All our investment related institutions have fully functional Public Relations departments.

Acceptance that these negative perceptions have hindered FDI is somewhat a reliable evaluation of Public Relations in this country.

I also suggest that it is a sign of how our institutions are extensively politicised and less functionally astute. Political rally posture should be very different from boardroom posture.

In Zimbabwe the fine line is invisible. Administrators are not appointed to echo political dictum, instead they’re appointed to bring ethos into fruition within the context of their institutional functions.

For instance, the NIEEB should not in appearance be a politicized representation. Instead, it is merely an organ to facilitate easy comprehension and compliance with indigenisation legislator requirements — a convenience for foreign investors. Perhaps subtle, but there is a profound difference!

We bemoan how indigenisation has been misunderstood, and that we have tried over and over again to clarify the laws.

These are simply admissions that we have failed to market our foreign investment laws as part of our aspirations to forge mutually beneficial relationships with partners who can contribute to creating socio-economic integration in Zimbabwe.

In effect, indigenisation is the solution to the very same marginalisation that has not only caused global economic slowdown, but social instability, confliction, and dire circumstances for the economically excluded.

Other institutions can learn from Finance and Economic Development Minister Patrick Chinamasa. His tenure thus far has been an example of how diplomatic persuasion can garner the attention of business.

You can hear this sentiment in the hallways within many embassies in the capital. Granted, actual investment figures are not where they should be, but in terms of traction in perception, he has done exceptionally well!

Third, do not be desperate and make the deal about you more than it is about your counterpart. Every month a different foreign delegation is flying into Zimbabwe.

However, deals are not being executed.

Are we conveying the right signals when we meet? In a wonderful article earlier this week in The Herald, Lloyd Gumbo raised concerns about the bureaucracy and red tape that welcomed Aliko Dangote’s retinue.

While our intentions were obviously diplomatically sincere, perhaps we showed a little over eagerness and could have caused inconvenience to business.

Also, if public discourse portrays predominant attitudes, in Dangote’s example, we focused on the billions he will pour into Zimbabwe, but very little elaboration on whether Zimbabwe will make him billions as well?

It should be an equal delight for us to be an economy where investors will find lucrative returns, and we must expound on that.

Such omission of consideration could be why we have yet to become competitive in terms of procedures surrounding locking in investment.

A few examples would be how Zimbabwe’s trademark system is not computerised; one has to look at files one by one.

We may still have a shortage of intellectual property (IP) experts as we lack patent attorneys and IP auditors.

These only cater to initial investment procedures.

It is inevitable in business that deal counterparts will have conflict. Do we have efficient substantive legal protection for foreign investors?

These are just a few procedural concerns that inform Green Field investors.

Deals must in effect be win-win.

We should get our share, but the best deals leave our counterparts feeling secure, delighted, and prospectively optimistic about long term returns from our mutually beneficial covenants.

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