Foreign and local investment in East Africa : interactions and policy implications

What is less clear is whether domestic investment can take the lead. If so, it is cheaper and more politically popular to focus on stimulating it. This study used Granger causality tests to examine the relationships between foreign and domestic investment on a 110-country investment database, using both annual data and 5-year averages for the period 1970 to 1996. Analysis showed that FDI has a strong impact on domestic investment. To the team"s surprise, in developing countries there was no converse stimulation of foreign investment by spurts in domestic investment. Three case studies, of Mauritius, Uganda, and Kenya, demonstrated the intricacies of investor relations and investment policies on the ground. All three have officially had FDI promotion policies since independence. These were often not coherent with other policies, however. Each country has experienced periods when macro-economic policies and/or ethnic tensions counteracted investment incentives. The role of Asians as "invisible investors" in Ugandan and Kenyan investment policy is explored. Tensions over their role need to be resolved. The first step is enacting and enforcing more precise fair trade legislation, so that unfair practices can be traced to individuals rather than blamed on entire groups. Then conscious efforts at outreach are needed on all sides. The study concludes with recommendations for a holistic approach to investment policy. Investment incentives will only pay off once countries overcome their ethnic particularism, and ensure that the fundamentals that attract investors are in place, namely: access to resources; secure mobility of people, goods, information, and capital into, around, and out of the country; sound institutions, including stable government, security of life and property, rule of law, viable financial services, and modern education and health systems; a proactive globalization policy, recognizing the importance of information technology; and alertness to international opportunities and obstacles as they appear. These issues are of such broad scope that investment climate monitoring needs to be conducted at the top levels, both government and private. Investment promotion centers have little impact until such monitoring is established. (Author abstract)