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FDI in Unrecognized Countries

Foreign Direct Investment (FDI) in Unrecognized Countries


By: Camillah Agak K.


According to United Nations Conference for Trade and Development (UNCTAD) Foreign direct investment (FDI) is defined as an investment reflecting a lasting interest and control by a foreign direct investor, resident in one economy, in an enterprise resident in another economy (foreign affiliate).


FDI is a key component for the less developed and developing countries to encourage foreign investors within their territories. It is a form of cross-border investment with the objective of fostering a lasting interest that an enterprise in one country might have in another enterprise operating in another country.


Berbera Port, Republic of Somaliland

Organization for the Economic Cooperation and Development (OECD)

FDI strategies:

  1. A greenfield investment – where a company sets up base in a foreign country and starts an enterprise from scratch. This is mostly used when expanding overseas;

  2. Brownfield investment – this is where a foreign company acquires an existing company in another country so that the establishment is not set up from scratch. Also known as cross-border mergers and acquisitions;

  3. Vertical investment – Here, a company invests in a business but plays the role of a supplier or distributers;

  4. Horizontal investment – A company invests in the same business abroad that it operates domestically;

  5. Conglomerate investments are on unrelated business ventures;

According to UNTAD: “Foreign direct investment is the largest source of external finance for developing countries. It is also a significant source of finance in the least developed countries, along with official development assistance and remittances. Potential benefits of foreign direct investment include the creation of higher skilled jobs, the introduction of technology and innovation and improved excess to international markets.”


UNCTAD reported that in 2018, world FDI inflows decreased by 13 per cent to US$1.3 trillion representing the third consecutive annual decline. Inflows on the one hand, comprise capital provided by a foreign direct investor to a foreign affiliate, or capital received by a foreign direct investor from a foreign affiliate. On the other hand, FDI outflows represent the same flows from the perspective of the other economy.


FDI to developed economies fell to US$557 billion, whereas flows to developing economies remained stable at around US$700 billion. As a result, unlike previous years, more FDI was directed to developing than to developed economies (this excludes financial centers in the Caribbean characterized by atypical use of FDI and difficulties in measurement as well as unrecognized countries as independent territories). FDI flows are presented on a net basis, i.e. as credits less debits. Thus, in cases of reverse investment or disinvestment, FDI may be negative. FDI is primarily seen in open economies, as opposed to tightly regulated economies that have unfavorable environments for foreign investors.


In 2018, eight of the top 20 host economies were developing economies. But the largest recipient of FDI was the United States of America, followed by China, Hong Kong SAR and Singapore. For most countries in Latin America and the Caribbean, Africa and South-Eastern Asia, FDI inflows accounted for more than two per cent of national GDP. The world’s largest foreign direct investors were Japan, China and France. (UNCTAD; 2019 Factsheet 9)


Due to their unrecognized status, unrecognized countries have a hard time attracting foreign direct investment. In addition, they are entirely unable to access or source for funds from international monetary organizations. As a result, there is an inherent lack of FDI in unrecognized countries due to uncertainty of the fact that the investment may not be protected by international law.


In the case of unrecognized countries, FDI opportunities would ideally target agriculture, transport sectors, technology & science, business, oils and minerals, construction among others based on strengths of the target territories. However, constraints presented by the absence of international banking groups that have connected global infrastructure adds to the cost of foreign investment and reduced international confidence in the territories’ financial management mechanisms. The prevailing atmosphere hence demand FDI ventures be undertakings from investors with particular vested interests in the development of unrecognized countries.


In the case of Turkmenistan for instance, foreign direct investments is mainly centered around natural gas as seen here. Somaliland in 2018 was the lead investment destination in Africa for the United Arab Emirates (UAE), receiving amongst the highest rates of FDI of all unrecognized countries. According to reports, thirty nine percent of the investment went to construction, 19 percent in ports and transportation while mining metals and chemicals took 15 percent of the country’s foreign direct investment.


Somaliland has sustained a great long term relationship with the dominant UAE which has seen to worthy investments in sectors including the construction industry, ports, transportation, warehousing and storage, mining and financial services. Somaliland and the UAE also signed a concession agreement to manage the Port of Berbera that would essentially grant additional sea access to the land locked Ethiopia. Further, the UAE also set up a military base once fully operational would materially boost security in the horn of Africa and its immediate environs. In this context, Somaliland is known to be a promising country for oil and gas. Two international oil exploration companies, the British company, Genel, and the UAE based RAK Gas will begin drilling their first exploration wells.


FDI is linked to economic growth and is widely deemed to be a catalyst for growth. As such, unrecognized countries employ natural capital, human and financial resources to become a critical part of the international trade circle. For unrecognized countries, the infusion of foreign money means a lot more than being able to accommodate bigger fiscal responsibilities, or a source for sustainable economic empowerment. Such investments are viewed as much needed accelerant for the territories’ attempts to achieve formal independence from parent countries.

References

  1. Unrepresented Nations and Peoples Organization (UNPO)Website: https://unpo.org/

  2. PH Team, Economy of Turkmenistan, Political Holidays, Jan 12, 2020 https://www.politicalholidays.com/post/economy-of-turkmenistan <Last accessed. Feb 23, 2020>

  3. UNPO, Somaliland: President Visits African Countries to Foster Trade and International Recognition, June 15, 2019, Available at: https://unpo.org/article/21565

  4. Vani Manoraj, The World Bank, the IMF and Unrecognized Countries, Political Holidays Nov, 2019 Available at: https://www.politicalholidays.com/post/the-world-bank-the-imf-and-unrecognized-countries

  5. UNCTAD Handbook of Statistics 2019 - Economic trends: Factsheet #9 on Foreign Direct Investments in 2018.

  6. Somaliland Leads in Foreign Direct Investment To UAE, Available at: https://stopillegalfishing.com/press-links/somaliland-leads-in-foreign-direct-investment-to-uae-2/

  7. UNCTAD, Promoting foreign investment in the Sustainable Development Goals, Sept 25, 2017 (TD/B/C.II/35) Pg, 3 Available at: https://unctad.org/meetings/en/SessionalDocuments/ciid35_EN.pdf

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