An uneasy tension: FDI promotion versus local industry development

A general discussion of Governments’ emphasis on Foreign Direct Investment, which often appears to be at the expense of developing their local industries.

http://www.freedigitalphotos.net/images/agree-terms.php?id=10012988In this week’s news roundup, there were a number of articles on Digicel’s interest and anticipated entry into the Bahamas telecoms market. The company is in negotiation with the Government to offer Internet/broadband services in the first instance, in order to get a foothold in the country, pending liberalisation of the mobile/cellular market, which is still at least two years away. However, one of articles reported that a major union in the Bahamas was prepared to oppose Digicel’s entry ‘if there are Bahamian companies that can do the job’  (Source: RJR News).

Although we might question whether there are indeed Bahamian businesses with the resources and capabilities to launch the scale of operation comparable with what Digicel might envisage in the Bahamas, the union’s view does highlight an ever-growing tension within the Caribbean, especially the ICT/tech industry. Governments are actively courting foreign companies in the hope that they will invest in their respective countries, but frequently they offer little support to their own indigenous industries. This post, which may be the first of many on this topic, introduces the differing perspectives of local sector development versus Caribbean Governments’ focus on Foreign Direct Investment, and suggests in summary why it is important for that impasse to be bridged.

Supporting local

Across the Caribbean and to varying degrees, there are nascent- to- burgeoning local ICT/digital industries in areas such as:

  • website design and development
  • software and application development
  • shared and/or IT export services
  • equipment sales and services
  • animation
  • other IT-enabled services.

Many of those businesses are micro- and small enterprises, employing fewer than 20 people. They might be generating enough revenue upon which to subsist and perhaps implement incremental growth, but many are struggling with a broad range of challenges, such as:

  • being unable to access financing that will facilitate profitable expansion
  • having difficulty accessing markets, particularly international markets, or large contracts that could lead to business expansion
  • limited access to expertise that could assist them with positioning their businesses for growth and/or expansion
  • having an inadequate track record that could demonstrate credibility for financing or a capacity for larger projects
  • being otherwise constrained by local infrastructure or support services, e.g. high telecoms cost and limited capacity; and/or prohibitively expensive or underdeveloped e-commerce/e-transaction framework, especially for cross-border payments.

Many of those businesses are looking for their respective governments to either, at the very least, create the enabling environment, or provide specific support that would allow them to grow and become more competitive. Governments, in turn, might introduce certain policies and systems, but generally are not allocating the resources or effort that the local industry believes it needs.

Why FDI?

Simply put, “Foreign Direct Investment” (FDI) typically speaks to investments made into a business or entity based in a particular country by an overseas business or entity (Source: Investopedia). It is seen as an important driver of economic growth and development, particularly in developing countries, such as the Caribbean. Furthermore, in addition to contributing to a country’s GDP (Gross Domestic Product) and foreign exchange earnings, FDI can effect, among other things, employment creation, knowledge transfer, along with improvements in the technology available locally, in business practices and in productivity.

In comparison to the effort and resources that might be needed by local sectors, particularly micro, and small and even medium enterprises, FDI opportunities can be especially high yielding to governments – resulting in considerably large investment (in the millions of United States Dollars) along with other associated and desired benefits, such as job creation. The potential for such favourable dividends – large investment and ample jobs, from a relatively small spend– has been an important reason why countries worldwide, including many in the Caribbean, have been positioned and promoting themselves as offshore outsourcing locations, e.g. for contact centre and business process outsourcing, software development operations, etc.

Possibly bridging the divide?

http://www.freedigitalphotos.net/images/Asia_g241-The_Bridge_Of_River_Kwai_p85744.htmlOn the face of it, the support that local industries believe they need from Government can be at odds with Government’s own imperatives for a country’s economic growth and development, especially in light of the limited resources that many countries are experiencing. Having said this, Government ought to support and nurture local sectors, as it may also strengthen how the country positions itself for investment and the calibre of services it attracts. This is particularly the case in the tech/ICT industry, where increasingly, businesses are looking for a demonstration of the talent as well as evidence of competent local businesses with which to potentially partner.

Furthermore, and perhaps more importantly, a more enabling environment could encourage increased local investment, which again will also contribute to Governments realising their economic goals. Hence, in order to maximise whatever efforts Governments can direct towards facilitating development of local industries, the approach ought to be coherent and targeted, which clear and (hopefully) measurable outcomes. However, this would require, in the first instance, comprehensive stakeholder consultations, to gain a clear understanding of the current situation, along with the challenges that are being faced and could be remedied.

 

Image credit:  Idea go (FreeDigitalPhotos.net); Exsodus (FreeDigitalPhotos.net)

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