Foreign direct investment from developing countries : the case study of Mauritius

E/ECA/UNCTAD/3 15 December 1993

Original:ENGLISH UNITED NATIONS

SOCIAL COUNCIL

ECONOMIC COMMISSION FOR AFRICA _ _

Trade and Development Finance Division ECA/UNCTAD Joint Unit

FOREIGN DIRECT INVESTMENT FROM DEVELOPING COUNTRIES

___ THE CASE STUDY OF MAURITIUS ---

Table of Contents

Page

I. INTRODUCTION 1

A. Background 1

B. Foreign direct investment from developing countries 3

1. Benefit 4

2. Risk 4

C. Foreign direct investment and development 5 II. REVIEW OF PAST DEVELOPMENT AND PRESENT SITUATION... 5 A. The period of transition: introduction of structural

adjustment programmes 5

1. Economic background "-

2. Structural adjustment programmes o

B. Investment incentives schemes 7

C. Mauritius Export Processing Zones (MEPZ) 8

1. Scheme 8

2. Economic growth 8

3. The East Asian mode EPZ 10

4. Leading investors 14

III. BASIC PROBLEMS AND ISSUES 15

-i ca3 issues and training. . 15 B. Problems of financing, marketing and

regional cooperation 15

IV. PROSPECTS AND POTENTIALITIES FOR DEVELOPMENT OF INVESTMENT FLOWS FROM DEVELOPING COUNTRIES

INTO MAURITIUS 16

A. Economic Processing Zone and

foreign direct investment 16

B. The African Preferential Trade Area region

and foreign direct investment 18

C. Indian Ocean Commission and

foreign direct investment 18

V. CONCLUDING REMARKS 18

A. Tasks for the next decade 18

B. Lessons from Mauritius 20

A. Background

1. Investment inflows to Africa rose to $2.5 billion in 1991, an increase by 21 percent from 1990. The total in 1991, however,' was still below the annual average of some $2.7 billion for the

period of 1985-1990.

2. Table 1 shows the gainers and the losers on the flows of foreign direct investment (FDI) in Africa during the 1980s.

Mauritius is the leading gainer followed by Guinea, Egypt*

Madagascar, Swaziland, Zambia, Morocco, Kenya and Lesotho'.

Mauritius has been receiving investment mainly, to the textile and clothing manufacturing in the Export Processing Zone from Hong Kong, France, Taiwan and other developed and developing

countries.

3. Over hhe last decade some countries li>e Kenya and Guinea

" -■-'■- ... . . et; ,_..--.n l

Promotion Centre was overhauled and issued a new "Investor's Guide". Guinea has introduced a new legislation offering a wide range of guarantees and opportunities for foreign investors. l 4. Swaziland and Lesotho have benefited from investment from South Africa. In Lesotho, among more than fifty companies registered as foreign owners, thirty-four of them --distributed between fourteen wholly-owned companies and twenty joint ventures are based in South Africa. Although investment inflows to Africa are still slow and outflows from Africa is negligible increased investment outflows from South Africa could bring benefits to the Southern African region so that South Africa would play a major role as one of the engines for Africa's

development.

5. Many African countries have taken structural adjustment programmes since the 1980s. A key feature of the programmes has been the creation and sustenance of a policy and regulatory

UNCTAD (1993 a). World Investment report: Transnational Corporations and Integrated International Production (New York, United Nations Publications, Sales No. E.93.II.A.14).

UNCTAD (1994), Overview; Foreign Direct Investment in Africa during the 1980s in World Investment Directory 1994: Volume IV Africa and west Asia (New York, United nations publications

forthcoming).

3/ ECA/UNCTAD Joint Unit, (1991) Foreign direct inveatmrnft »«

source of development finance for Africa: focus on Southern

Africa, E/ECA/UNCTC/75, (UNECA, Addis Ababa). "

Page 2

Table 1 Significant Increases and Decreases in FDI by country 1981/3-1989/91 (millions of United States dollars)

Country

A. Big Gainers Egypt

Guinea G-Bissau Kenya

Lesotho

Maaagascar I'IdUi -Li i-L^S Morocco

Seychelles Swaziland

Zambia B. Losers Algeria Oameroun I CAR

| Con^o

Mauritania Tanzania Tunisia Ruanda Zaire C. Stable Botswana

Cote d'Ivoire D. Revivers Ghana

Mali Senegal

1981-3

51 1

0 17 4

^_

62

10 6

Q

102 10 5

7

41 10 12 .6 272 17 -42

44 . 4 39

12 3 9

1989-91

T

10 5 8 17

2 52 13 _l b

~) i 1

24 45

41

10 / 7 . 1 -1

r-

1 2 .6 71 9

_ i

40 .1 45

10 12 12

% change 1981/3- 1989/91

2 074 2162

308 302

i ; u "j

352

250 772

450

- 90

.. -c

- 8 0 0 - 84 -88 -79 -73 -44

-10 14

-12 432 ' 26

GDP growth rate 1980-9

5 .4 n. a .

n. a .

4 . 1 3 .7 0 .8

r- n

4 . 1

2 .l(a)

0 .8

3 .5

1 U

2 .9

1 .4

2.6 3 .4 1.5 1.9

11.3 1.2

2.8 3.8 3.1

Note: (a) 1985-9 only. _ .

« ^kio c ,■« TTNrTan M9931 . Overview: Foreign Direct

environment to encourage private sector trade and investment,

especially foreign direct investment.

6 Creating an environment to foster private investment has required governments to steadily dismantle state controls over pricing and trade while adopting fiscal and monetary measures to control inflation and exchange rate overvaluation. Between 1982 and 1987 more than one third of African countries either introduced or made adjustments to ..their investment codes or

guidelines in order to attract FDI.

7 In developing countries, when most international exchange involves the trading of finished and relatively cheap consumer goods such as clothing and footwear, FDI and trade linkages are likely to be explained as import substituting or export promoting: if markets are large, then foreign direct investment usually takes place for market-penetration purposes (import

substituting r if markets are small, then the country can be used

as an export base (export promoting;-

8 In Africa, the size of the market is a statistically significant determinant of FDI inflows, and changes in Gross National Product (GNP) did influence flows to Africa. The depreciation of the exchange rate 7/also had a very important

effect in encouraging FDI inflows.

B. Foreign direct investment from developing countries

9 Like firms from the developed countries that have set up

offshore plants to supply their markets, exporters from the developing countries have responded to exports from other suppliers in countries with lower costs by seeking lower wages

4/ World bank (1992), Investing in Africa: The World Bank's

Programme of Assistance and Opportunities for the Private

Sector, Industry and Energy Division Note No.9 (Washington,

D.C., World Bank).

5/ UNCTAD (1994)/ Overview: Foreign Direct Investment in Africa during the 19 80s in World Investment Directory 1994: Volume IV

Africa and west Asia, op.cit.

6/ Other types are "resource-seeking foreign direct

investment", »technology-seeking foreign direct investment"

and "efficiency-seeking foreign direct investment". TCMD

(1993), Foreign Investment and Trade Linkages in Developing Countries (New York, United Nations Publications, Sales No.

E.93.II.A.12).

7/ UNCTAD (1993 b), Explaining and Forecasting: Regional Flows of Foreign Direct Investment (New York, United Nations

publications, ST/CTC/SER.A/26).

Page 4

than their home countries offered. For example. Hong Kong firms went to Macao, Mauritius, the Philippines, and Thailand, where

wages were lower.

1. Benefit

10 There is a strong preference in the developing countries for multinational corporations from similar countries. It is often said that: these Third World multinationals are more adapted and more adaptable to the economic, social, cultural, and climatic conditions of the host countries; that their technologies save capital and foreign exchange, and generate more jobs; that the firms are on a smaller scale, more flexible and readier to enter into joint ventures, use more local materials, and^enerally are

more adapted to the host countries' environment.

11 Since the Third World multinationals often are more

independent of their parent firms, they tend to remita smaller proportion of their profits to their home countries, ^-^y oi

alternatives to excessive dependence on the multinationals Il-U

the developed countries. Moreover the Third World multinationals give them certain special advantages in terms of

financial, managerial, and technical resources.

2. Risk

12 The Third World multinationals also, however, have some drawbacks compared with multinationals from the advanced countries. First, with some exceptions, they tend to be more

suited for production for the domestic market than for exports.

Second, they keep more expatriates in managerial and skilled professional jobs than their industrial country rivals.

C. foreign direct investment and development:

13. The basic idea of investment-development path is that the relationship between inward and outward FDI flows of any country

8/ Wells, Louis T., Jr. (1983), Third World Multinational: The Rise of Foreign Direct Investment from Developing Countries

(Cambridge, Massachusetts, MIT Press).

97 Lall, Sanajaya (1983), in collaboration with Edward Chen, Jorge Katz, Bernardo Kosacoff and Annibal Villela, The New Multinationals: The Spread of Third World Enterprises

(Chichester, John Wiley and Sons).

10/ Wells, Louis T., Jr. (1983), Third World Multinational: The Rise of Foreign Direct Investment from Developing Countries,

op.cit.

goes through predictable stages of evolution as the economy

develops.

14. The investment-development path identifies five stages in the evolution of a country's net FDI position which, in turn, is a function of its stage of development: 1) stage one with very low levels of income and low inward and outward FDI; such poor economies offer few attractions to established TNCs, and domestic

firms lack competitive advantages.

2) stage two with rising inward FDI when incomes rise, infrastructure improves, markets grow and human capital is enhanced through education and training; at this outward investment is still low or negligible since few ownership

advantages have been accumulated.

3) stage three with higher levels of inward and outward FDI achieving intermediate level of industrialization; the third

stage encompasses :.".;■:.:. o n ; -^ -1;—" .-..■ —A "V"

flows and with sizeable industrial sectdoi uhesc ^iciuac nona

Kong, Singapore, Indonesia, Malaysia, Thailand, Argentina, Brazil, Venezuela, China, Egypt, India, Pakistan.

15. Most developed countries are under the categories of 4) stage four with outward FDI exceeding inward FDI; 5) staqe five as an "equivalency" stage in which there is a reconvergence of

outward and inward FDI.

II. REVIEW OF PAST DEVELOPMENT AND PRESENT SITUATION

A. The period of transition: introduction of structural

t programmes

1. Economic background

16. In 1970 manufacturing accounted for some 8 percent of GDP and reached a quarter of GDP in 1989. Until the early sixties, sugar and its by-products accounted for well over a third of GDP and 99 percent of total exports in Mauritius. Although sugar still remains the major net foreign exchange earner, its share of

exports has fallen to the second place in 1989.

17 Total foreign exchange earnings for agricultural exports for 1989 were Rs 5.4 billion ' (35.1 percent of total gross exports earnings), of which the sugar sector fetched Rs 4.9 billion and tea exports earned Rs 0.066 billion. Duty on sugar exports

117 TCMD (1993), Transnational Corporations from Developing Countries: Impact on Their Home Country (New York, United Nations publications. Sales No. E.93.II.A.8).

12/ US $ 1 = 15.5 Rs; Rs 1 = 0.0645 US$.

Page 6

i- * f^r- a. R nercent of total revenue for the financial year

accounted for 4.8 percent oi uuuo. _prrpnt of total

89/90. The sugar sector^ represented 14.5 percent of total

employment in March 1990.

during 1983-1988 and

gross

IP The service sector (transport and distribution, hotels and

mummm

^{R 5 billi in 1989}

m

14.5 billion in 1989

during the 1985-89 period.

91 Total exports have risen by 21.6 percent annually on average

during the^riod 1983-1989. Other sectors contributing to rapxd

^ our competitive edge.

22 The Mauritian economy has experienced significant structural

over 3 9 percent of the work force.

2. structural adjustment programmes

23. Mauritius embarked since 1979 on a ■t^ilizatioa and a

- 3) reductions in the overall fisc

;y»t« of trade (i.e. reductions in tariffs, elxmmatxon

13/ Ministry of Industry and Industrial Technology (1991)I , Mauritius at CroSBroads; The Industrial Cham flnqes Ahead

(MIIT, Mauritius).

of quotas, easier access to import permits, more flexible exchange control); 5) reductions in consumer subsidies; and 6) wage restraints.

24. The structural adjustment programme was initiated in the early eighties. An export led strategy was developed. The main policy measures are: 1) improving the competitiveness of the industrial sector; 2) introduction of additional incentives to promote exports; 3) eliminating quantitative restriction on imports and initiating tariff reforms; 4) attracting foreign investment and transfer of technology; 5) adoption of a flexible exchange rate; and 6) adoption of a rational wage policy.

25. The structural adjustment programme was subsequently accompanied by a revision of the tax structure, introduction of a new package of exports incentives and new policies to attract foreign direct investment and transfer of technology.

Significant improvements were achieved in the overall budget deficit, the external currenr.-account balance, ana "he domestic inflation rate.

2 6. The structural adjustment created new private business opportunities: 1) devaluation makes exports and import- substitution more profitable; 2) trade liberalization offers the ready availability of imported inputs and makes it possible for many firms to expand exports; 3) deregulation creates a freer environment for private corporations.

27 . With the structural adjustment Government has improved conditions for FDI: 1) restricted sectors have become fewer; 2) screening procedure have been simplified; 3) the share of enterprises which may be owned by foreigners has been raised: 4) new investment incentives have been created; 5? restrictions Le

the transfer of profits have been relaxed; 6) debt/equity

conversion schemes have been created, which enhance investment

• ._ ■ 1^/

opportunxties.

B. Investment incentives schemes

28. Mauritius has devised a number of incentive schemes for investors in different activities in order to attract investment as follows: 1) the Export Processing Zone Scheme as governed by the Export Processing Zone Act No. 57 of 1990; 2) the Development Incentive Scheme as governed by the Development Incentive Act No.

50 of 1974 and geared towards the setting up of import substitution industries on the island; 3) the Agricultural Development Scheme as governed by the amended Development Incentive Act of 1981 with a view to promoting agricultural diversification.

14/ Guy P. Pfeffermann, (1988) Private business in developing

countries: improved prospects, IFC Discussion Paper Number 1 (Washington, D.C. The World Bank).

4) the Film Development Scheme as governed by the Mauritius Film Development Corporation Act No. 31 of 1986 and geared to encourage the development of film industry in Mauritius; 5) the Industrial Buildings Incentive Scheme under the Industrial Buildings Incentive Act No. 24 of 1986 aiming at the development of industrial parks to house manufacturing establishments; and 6) the Export Service Zone (ESZ) Scheme in accordance with the ESZ Act No. 8 of 1981 aiming at boosting the tertiary sector.

C. Mauritius Export Processing Zones (MEPZ) 1. Scheme

29. The following fiscal incentives and advantages are offered to industrialists who set up companies in Mauritius Export Processing Zones.

3 0 . The schemes are: 1) payment of a nominal rate of 15 percent corporate tax; 2) exemption from payment c: income tax on dividends for the first ten years; 3) free repatriation of capital, profits and dividends; 4) complete exemption from payment of import duty on productive machinery and equipment and spare parts; 5) complete exemption from payment of import and excise duties on raw materials and components.

6) allowances for tax purposes in respect of new investments in manufacturing companies, building, machinery and equipment;

7) exemption from payment of half the normal registration fee on land and buildings by new industrial enterprises; 8) the issues of residence permits to promote and key technicians as warranted by the size of their investment and degree of technological input

in the country.

9) lavouracie labour legislations to assist enterprises to meet their objectives; 10) guarantee against nationalisation; and 11) equitable settlement of disputes assured by the Government's adherence to the convention on the settlement of investment disputes administered under the auspices of the International Bank for reconstruction and Development.

2. Economic growth

31. The manufacturing sector, and in particular the MEPZ established around 90,000 job opportunities in 19 91. Table 2 shows that the MEPZ enterprises are more likely to be small and medium-size enterprises over last five years from 1986 to 1991.

The tight labour market seems to be explained more by the buoyant

activities of the construction, tourism, trading and

manufacturing sectors.

Small and medium size enterprises are defined as firms whose employment is less than 500 unless otherwise specified.

Table2-DistributionofEPZenterprisesbyemploymentsize-asatDecember1986and 19911/ EmploymentSizeK.ofenterprisesNo.ofpersonsemployed K.%Cum.No.<Cum. Under 10 51 101- 301- 501-

10 50 100 300 500 1000 1000andabove TOTAL

1986 1991 1986 1991 1986 1991 1986 1991 1986 1991 1986 1991 1986 1991 1986 1991

4 8 ie: 22: 6: <V 7?. 107 r 3' 2? 2? Ts If 4OB 56£

11 14.8 40 38.1 17 16.2 18 17.6 5 5.8 6 4.8 3 2.7 100 100

11 14.8 51 52.9 68 69.1 86 86.7 91 92.5 97 97.3 100 100 100 100

4, 5, 5, 5, 13, 19, 7, 13, 19, 19r 24, 26, 74, 89,

251 481 392 855 01^ 704 057 i'?" r<>i L9C i"8': --,:- 24F 98V 01f t,i[-

0.5 6 6.4 6.3 18 21.0 10 14.5 26 21.6 33 29.7 100 100

4- 0.5 6 6.9 13 13.2 31 34.2 41 48.7 67 70.3 100 100 100 100 Source:MinistryofEconomicPlanningandDevelopment,1991 1/Provisional

Page 10

32. Emphasis on industrialization since 1983 shifted from import substitution to export led growth. The export performance of the MEPZ has been remarkably impressive during the last six years.

The MEPZ's share of the total export overtook sugar exports as from 1985 and reached around 63 percent in 1990.

33. Table 3 presents that France and the USA accounted for one third of the total export in 1992, although the French share had declined. The sources of imports are more diversified with top three leading countries of France, South Africa and Japan (table 4) .

34. The total value of FDI flows to MEPZ rose until 1989, declining as from 1990 (table 5) . In 1989 Germany and the United Kingdom have invested for the projects: Woventex and Socota through two financial institutions. Hong Kong has been dominating the volume of FDI except 1989.

35. During the period of 1^85-1991, Hong Kong accc_.::oec. ," .. r more than one quarter of total FDI followed by France vvich 10.2 percent and Taiwan with 7.1 percent. Among developing countries, Hong Kong, Taiwan, and China are top three investors. In 1991 Hong Kong and China became the second and the third investors, though the total FDI volumes drastically dropped.

3. The East Asian mode EPZ

36. With the sole exception of Mauritius, there is no African economy that is strongly export oriented in the East Asian mode.

By 1979, Mauritius could count at least 15 export-oriented textile plants established by Hong Kong parents. Indian firms also located in Mauritius, citing its preferential access to the CoiPTnon Market as a major reason for investing there. ,r;ever& I foreign firms, in Mauritius, for example, have had diliiculty with the Common Market's rules of origin, as more value had to be added within the EEC or its associates for products to qualify

for special treatment in Europe.

16/ Yin, Pierre; Yeung, Donald Ha; Kowlessur, Deshmuk; and

Chung Mirella (1992), L'ile Maurice et sa Zone Franche: la deuxierne phase de developpement (Mauritius).

17/ Lall, Sanajaya (1991) , Human Resources, Technolocry and

Industrial Development in Sub-Saharan Africa, in Economic Reform in Sub-Saharan Africa edited by Ajay Chhibber and

Stanley Fischer (Washington, D.C., the World Bank), pp. 263 - 276.

18/ Wells, Louis T., Jr. (1983), Third World Multinational: The

Rise of Foreign Direct Investment from Developing Countries, op. cit.

Table 3

Total Exports: Countries of destination, 1981 - 1986 - 1991

Value : Rs Mn (f.o.b.) Country of destination ^{1981 1986 1991}

A/

Total Exports

Preferential Tariff Countries E.E.C. Countries

Belgium Denmark Frnace

Germany, Federal Republic of Italy

Netherlands Portugal Reunion

United Kingdom Other

Other Preferential Tariff Countries Australia

Canada Hong Konq India Kenya

Malagasy Republic Malawi

Malaysia New Zealand Pakistan Seychelles Singapore

South Africa, Republic of United States of America U.S.S.R.

Zimbabwe Other 2/

Genexa 1_ Tariff Countries China

Comoro Islands Finland

Isreal Japan

Korea Rep.

Morocco Norway

St. Vincent and Genadine Island Sweden

Switzerland Taiwan

United Arab Emirates United Arab Republic Other 2/

4 2/

10

6 2/

49 150 7 2/

5

1/

11

2/

1 3/

3/

2/

3/

17

2/2/

11

9.063 8,892 7,010 178 66 2 , 121 660 208 151 1 212 3,405 8 1.882 34 166 64

12

4 3 14 10 4 26 1,457 32 1 17 X2.1

4

12 32 1 2 44 3

2 37

2 24 8

18F653 18.017 14,977 328 31 3,724 2,055 916 368 171 364 6,664 356 3.040 55 96 93

l~>

22 105

16 4 16 178 70 75 2,207 2 56 39 63£

13 2 26 2 88 52 1

47 224 23

152

1/ Provisional

Source: Ministry of Economic Planning and Development, 1991

Page 12 Table 4

Country of Origin

Imports-main countries of origin-values. 1981-1986-1991 RS Million (C.I.F)

1981 1/ 1986 1/ 1991 1/

Total !mp(.;t ', -

Preferential Tar iff Countries EEC Countries

Belgium Denmark France

Germany,Federal Republic Greece

Ireland Italy Luxembourg Netherlands Portuqa]

Reunion Spa i n

United Kingdom

Other fEC Countries 2/

Countr i es Australia Bahamas Burma Canada Hong Kong

India Kenya

Malagasy Republic Malaysia

New Zealand Pakistan Singapore

South Africa.Republic of Sri 1 ark 6

j. * .. . c;■-.".? , -...h no Zimbabwe

Other 3/

General Tariff Countries

Argentina Austria Bahrain Brazil China Hungary

Indonesia Israel Japan

Korea.Republic of Kuwait

Macau Morocco Philippines Sweden Switzerland Taiwan Thailand

United Arab Emirates United Arab Republic Other 4/ 5/

976.8 3.46. l 384 . i 50.6 14.:

535.2 166.8 4,12/

155.3 2/

26.1 2.1 2/2/

4^3.5

9

h

3.

1

! c'9 '■' ■.'

A' ■- 161 ,24?

531 95 24

^2 5 92 23 i

257.8 3/

61.6 7.4 70.3 186.3 148.1

70"?

3/

161.1 112.6 96.9 480.5 3_

265.?

3/

25.2 1.630.3 4/

4,-' 771.8 22.4 187.2 4/4/

34.1 282.4 50.2

4/

4/

4/

9?6

29.3 67.2 6.8 4/

16973

7 .3 625 281 86 )3 14]

105 J86 913

8 37 2.881 S;

307 8

I'/

5/

4^0 2 b 67?

270

1

?4,650

•7,326 S.069 334 65 3,283 358 141 95 781 7 179 38 14 97 i , 6 7 7

796 55 54 ,060 ,115 155 235 539 337 309 741

157 417 57 1 5/

202

10 7?0 3i 232 7.324 139 27 628 181 949 11 144 99 1,770 377 30 33 33 81 349 1,104

270 204 6 889

Table5SOURCES0'FOREIGNINVESTMENTSINMEPZ(Rs»000) Sources Australia China France Germany Netherlands HongKong India Italy Pakistan Seychelles Singapore SouthAfrica Switzerland Taiwan UnitedKingdom USA Zimbabwe Others TOTAL

600 9,935 510 90,902 1,605 867 2,004 530 250 2,280 3,796 830 114,109

1986 4,359 3,464 23,939 100 698 7,580 1,400 3,141 550 28,174 73,405

1987 6,505 7,572 500 400 2,420 12,571 6,466 15,175

1,000 20,469 13,252 1,785 10,295119,949 1,0151,495 2,000 1,000 360 1,825 12,387 126,28460,362

1989 6,018 31,937 49,663 2,200 19,407 585 6,681 1,700 2,625 5,300 1,598 3,929 13,338 28,698 2,203 122,6:,; '89,203235,884298f5v

1990 4,500 13,354 57,948 3,761 54,636 294 31 250 18,640 62,647 7,218 375 46,541 270,195

1991 201 10,687 7,521 300 11,227 2,675 4,500 3,100 23,913 2,700 52,989

Total 12,806 50,528 132,524 59,983 2,200 330,355 4,800 11,215 1,731 4,625 8,704 17,238 25,669 92,031 84,103 19,521 5,278 437,847 119,8131,01,158 Source:MinistryofEconomicPlanningandDevelopment,19910)

•S

37. It is clear that the incentive packages, low labour cost,

labour-intensive industry and bilingual workers in EPZ attracted investors from developing countries such as Hong Kong, China, Singapore, Pakistan, India and Zimbabwe, which were seeking for

lower labour cost.

38. It is also pointed that the family ties of the populations such as Chinese and Indians, which consist of 75 percent of the

total population, functioned positively in order to get

investment from these countries to Mauritius. For a number of firms, ethnic ties have had a major influence on decisions to become involved in production in other countries.

3 9. The extensive overseas communities of Chinese and Indian origin have served to encourage exports that have led to investments. The cost of acquiring reliable information about foreign markets is large, and it is likely to seem particularly burdensome for the relatively small firms from developing countries. Overseas Indian and Chinese communities provide exactly this kind of link for firms from India and China.

4. Leading investors

40. Hong Kong has been by far the largest developing-economy

investor in Asia and probably in the developing world, investing nearly $ 19 billion by 1990. Hong Kong investments initially were spread widely through neighbouring countries, but by the mid-1980s China was a main recipient country. More than half of Hong kong FDI was invested in China by the late 1980s.

Indonesia, Taiwan, Singapore, Malaysia and Thailand are other main developing-country destinations for Hong Kong investments.

41. Wit* respect to the pectoral distribution of FDI from Hong Kong, within manufacturing, textiles, garments, light electronics and plastic products have been the leading sectors. The aeoaraphical distribution of FDI reflects ethnic and locational

^_factors.? 20/

42. Taiwan appears to be the fastest-growing overseas investor in the developing countries. There were more than 2,000 Taiwanese firms in China in 1991, and more than 1,000 factories have been established in South-East Asia; most are labour-

intensive small- and medium-size enterprises.

19/ Wells, Louis T., Jr. (1983), Third World Multinational: The Rise of Foreign Direct Investment from Developing Countries,

op.cit.

20/ TCMD (1993), Transnational Corporations from Developing

Countries: Impact on Their Home Country, op.cit.

43 The value of Indian FDI in joint ventures abroad totalled an estimated amount of $ 76 million at the end of 1988, with 92

percent of the total located in developing countries. However,

these figures do not provide a complete picture because a

considerable proportion of outward investment is done through holding companies and subsidiaries of Indian companies already located overseas. Indonesia, Thailand, Senegal, Kenya and Nigeria are main recipient countries from India.

III. BASIC PROBLEMS AND ISSUES

44 Notwithstanding the remarkable success: by the mid 1980s GDP per capita had risen to about $ 1400, up from $700 in the 1970s, and unemployment declined, the economy faces new challenges which are manifested through increasing wage and price pressures whijji threaten the economy's competitiveness in export markets.

Some of the issues are: A. Technology and training and B.

Financing, marketing ana regional cooper vc ..- :.. - A. Technological issues and training

45. With the economy near full employment, the current strategy

is to regain the competitive edge through enhanced labour productivity in addition to export diversification. This process

should require new investments to substitute existing

technologies for more advanced (capital-intensive) ones, as well as investments in new product lines, rather than simply allocating a higher percentage of the budget of the Government to training or education in the areas related to the new

technology.

B. Problems of financing, marketing and regional cooperation

46. To finance the new investments without exerting undue burdens on'the country's external indebtedness the government would need to increase the level of domestic saving and improve the

efficient allocation of investable funds.

47. Higher saving levels can be realized through increased

private saving, government saving, or both. Enhancing private saving and their efficient allocation for investment can be best

achieved through a well-functioning financial system.

48. The creation of semi-autonomous regional development agencies that provide not only information, but also technical and organizational support to entrepreneurial initiatives can mobilize resources more effectively and at less cost than central

authorities.

21/ World Bank (19 92) , Mauritius Financial Sector Review

(Washington, D.C., the World Bank).

Page 16

IV PROSPECTS AND POTENTIALITIES FOR DEVELOPMENT OF INVESTMENT

FLOWS FROM DEVELOPING COUNTRIES INTO MAURITIUS

49 Over the last ten years, Mauritius has witnessed striking transformation from high unemployment rate (estimated at 20 percent), structural deficiencies of industry (overdependence on the sugar industry: 14.5 percent of GDP), and external payment crisis to almost full employment with around 2 percent- unemployment rate, sugar dependence rate with 9.3 percent, high annual average growth rate with 6-7 percent, $ 2,600-per capita income and $ 900 million-foreign exchange reserves m Mauritxus

(table 6) .

50 This success was more likely to depend on the following factors favouring FDI: 1) political stability, an open democratic structure, and a liberalized economy; 2) an attractive package of incentives and advantages to local and foreign investors in

the Economic Processing Zone (EPZ); 3) well developed infrastructure such as roads, communication links, reliable water and electricity supplies; 4) duty-free and quota-free access to the European Community; 5) human resources with literate and productive labour force; 6) excellent banking and financial

institutions.

51 In the economic conditions surrounding FDI described above the development of FDI developing countries in Mauritius could

be examined in three approaches such as: A) Export Processing

Zone (EPZ) and FDI from developing countries; B) the African Preferential Trade Area (PTA) region and FDI; and C) Indian Ocean Commission (IOC) and FDI, which are spelled out below. Regional co-operation such as the PTA and the IOC offers one possible avenue for expanding the market for trade and investment.

A. Economic Processing Zone and foreign direct investment

52. Launched in 1970, the EPZ has brought about an industrial revolution in Mauritius. Progressing at a slow pace up to 1983, the EPZ picked up tempo thereafter, maintaining an annual growth rate of 30 percent. However, since 1987 the growth rate has

slackened (7 percent in 1991).

53 Currently there are about 585 manufacturing units employing a "total of 90,000 workers (20 percent of work force) and contributing Rs 12,136 million (63 percent of gross exports in 1991). While textiles and knitwear account for about 80 percent

of all EPZ exports and the Government is encouraging

diversification in other sectors --electronics, toys, leather, jewellery, printing, plastics and others. Since 1990 most of the

EPZ enterprises set up are non-textile forms.

54. The EPZ has attracted FDI from many developing countries as

well as developed countries. For example, Taiwan is the largest

source of the total Rs 270.2 million, followed by France, Hong

Kong, Switzerland, China, United Kingdom, Australia, Germany,

Zimbabwe, Italy, South Africa, Pakistan in 1990.

Table 6 Selected Economic Indicators

UNIT 1370 1976

1. Population (mid yBar) 2. Per capita GNP

3. GDP at current market prices 4. GDP at cuirmt factor cosl

- breakdown (as a % of total) Agriculture, hunting, forestry, fishing

- sugar Manufacturing

-sugar -EPZ Construction

Wholesale, retail trade. Rest. 6 hotels - resi & hotels

5. GDP at constant 1982 piices 6. GDP at constant 1987 prices

Gross Oor"-',.

9. Savings Rale 10. Investment (GDFCF) 11. Investment Rate

12. GDFCF (annual real growth rate) 13. Exports

- sugar (as a % of total) - EPZ (as a % of lotal) 14. Imports

-food

- petroleum products

■ capital goods 15. Visible trade balance 16. Balance ol payments 17. Foreign Exchange Reserves

18. Employment (septembet)4 -agriculture (as a % of lotal) - manufacturing ( " ) 19 Unemployment 20. Unemployment Ri. e 21. Inflation rate

2Z. Overall budgol5

- as a % ol GDP 23. Debt service ratio 24. EPZ

- No. ol firms No.

- No. ol employed - Exports - Imports 25. Tourist arrivals 26. Gross Tourism Earnings

000 Rs fls

■

%

- -

- -

Rs

Rs

Of

■ Rs

% - Rs

■

Rs Rs 000

%

■ oor

-

Rs

%

%

000 Rs Rs 000

Rs 805 5

1111 1192 1017

23.4 15.8

5.4 102

.--

;,.

145 12.0

359 86 0

420

%

- -21 94 310 130 2 46.9 60 25.3

1.5 20

85

27.7 879.2

5465 4704 4165

22.5 (20.8) 152 (5.5) (2.6) 80 11.3 (1-6)

1287 27.0

1835 72.0 11.0 2409 36.0 7.0 133 -574 -SOO 630 184 5 34.8 160 2? 6

13.4 -250 4.9

115 17.4 309 273 92.6 184

960.9 11680 11725 10020

15.3 (11.4) 15.6 (3.1) (4 5) 62 12.9 [2 4) 10020 :."

VjA 2100 17.9

■14 4363 56 5 29.0 5048 24.0 9.0 25.0

■685 -643 580 195.0 29.2 19 0 75 ■>

22 11.4

■1160 9.5 22.1

145 23.5 1236 743 11B.3 450

968.6 12685 12763 10613

13.8 (9.5) 15,8 (2.5) (52) 6.2 13.7 (2 6) 10063

i," i 23O0 18.0 32 4637 57.8 28.2 5175 28.0 18 0 10 0 -538 -510 392 194.0 28.8 19.8 707 20.2 5.6 -857 64 24.3

195 25.5 1307 847 123.8 603

977.1 14045 14360 12050

14.4 (9.7) 18 1 (2.7) (7.2) 57 136 (2 5) 10541

.1-

! O (' 2595 18.1 6.1 5490 46 0 39 2 6494 25.0 18.0 120 1004

■250 570 201.0 26.6 24 2 65 9 17.&

7.3 -824 5.4 26.8

290 37.5 2151 1650 139.7 630

985.2 16157 16618 13880

15.3 (11.1) 20.6 (3.2) (9.6) 5.6 132 (2 4) 11264

fi 6

2 1.6 3100 16.6 10 7018 41 0 46.6 8119 24.0 16.0 12.0

■1101 258 882 2150 24.4 29.2 E0.4 146 6.7 -641 3.6 19.4

40B 54.0 3283 Z530 148.9 845

993.8 i9oea 19700 16450

15.3 (11.6) 23.3 (3.7) (116) 5.3 14.0 (2.5) 12264 ,9

3890 198 19.9 9413 38.0 53.0 9199 20.0 14.0 14.0 214 1716 2450 238.0 Zl 8 35.2 49.5 11.9 1.8 -297 1.4 12.1

531 74.0 4S60 3837 165.3 1187

1003.B 22951 23576 19695

14.6 (10.8) 24 6 (3.4) (13.1) 5.3 15.0 (2 7) 13294 19695

£ / 4 5090 21.6 24.7 11927 36 3 55.0 13042 15 0 7.5 17.0 -1115 2788 4478 259.7 19.3 385 39.0 9.1 0.6 -227 0.9 11.0

591 B8.0 6567 4800 207.6 1786

1016.6 26766 27803 23181

13.2 (9.4) 24.3 (26}

(13S|

5.9 16.3 (2 8) 20904

t-j :>

7990 s 28.7 6 41 fi

13854 32.2 59.0

174606

12.8 7.3 22.0

■3606 2466 6428 271.2 18.3 39 2 22 0 5 9.2

■950 3.2 13.3

563 89.1 8179 5890 239.3 2374

1026.8 30884 32015 26839

12.6 (8.8) 23.7 (2-4) (12.8) 6.4 169 (3 0|

21824

ij i 6565 26.8

■7.1 15517 31 8 58.4 20217 11 3 5.8 306

■4700

8049 273 2 175 39 4 '5.4 3.5 12.6

■1047 3.1

568 88.7 9057 7502 262.B 2796

1036.8 35470 36945 31070

12.3 (8 5) 24.0 123) (130) 7.0 17.3 (3 2)

23306

c i-i

116OO7 31.47 20.87

17987 28.4 63.6 238487

13.1 7.5 22 9 5861

10000 279.4 16.8 38 6 11 3

*S 13.5 -840

89.9 11442 7389 291.6 35O0

1047.0 39245 41265 34765

11.2 (7.3) 24.1 (2.0) (133) 7 1 17.9 (3 4) 24304

11760 28.5 -4.1 19500

24500 12.3 8 1 26.1 5000

13000

315.0 4200

(1) Final estimates (2) Revised estimates (3) Fofecasl

(4) Large establishments

(5) Year 1983 refers lo FY 1983/1984

(6) include Ihe purchase of Z aircraft valued at Rs 1775 m

(7) Include the purchase of Z aircraft & 1 ship ME PD 14/06/91

Source: Ministry of Economic Planning and Development, 1991

Page 18

B. The African Preferential Trade Area region (PTA) and foreign

direct investment

55 As a member of the PTA grouping of 20 Southern and Eastern African countries: Mauritius, Kenya, Zimbabwe, Tanzania,

Sudan! and Botswana, Mauritius stands to benefit from pref

erential tariff rates.

56 The objective of the PTA is to achieve sustained transformation of the nature of production of national economies, producing mainly unprocessed and semi-processed agricultural and

mineral products.

57 However, there are still a number of constraints to the free flow of capital in this region such as restrictions on the outward transfer of capital, exchange rate disparities, the

bureaucratic procedures which investors need cu - - -<■, *. —1 "^

risk the double taxation, an absolute shortage of investment caniUl and restrictions on entry visa. There is little investment from the PTA to Mauritius except a case of Zimbabwe

in 1990.

C. The Indian Ocean Commission (IOC) and foreign direct

investment

58 The IOC consists of five islands, namely Madagascar, Seychelles, Mauritius, Reunion and Comoros. In Pursuing regional policy for self-reliance, the Commission has decided to mobilise all existing economic and human resources to improve and

safeguard th^ell^eing _of the members -^^^^^

proxu■. =. ~-.ng xnt-fcr-j.t-j.ano. t...«.*jt <^ =

transport and shipping services.

59 As a member of the IOC, Mauritius has easy access to

in the IOC region, such as in the tourism sector in Comoros and Seychelles and in manufacturing in Madagascar and Seychelles.

V. CONCLUDING REMARKS

A. Tasks for the next decade

60. Mauritius has achieved a certain level of/ndu?t^^j:"nt?n

over the two decades ("the first phase of industrialization > . The concern on "the second phase of industrialisation" in the next decade has been expressed by most of the government officials and the economists in the banks and private companies

in Mauritius.

61. At the second phase of economic growth the following issues will be raised.

more targeted promotional campaign to attract foreign investment and open up new markets, through the Mauritius Export Development and Investment Authority

(MEDIA);

diversification of the range of products manufactured and creating more job

opportunities for males;

encouraging manufacturing sector to purchase inputs in the local market in order to increase the percentage of local value added;

a shortage of technical and managerial skills;

competitiveness of the EPZ sector, especially garments and knitwear. This entails improvements in productiv ity and absorption of higher technology;

the inflation rate, which had decreased from 15 percent in 1989 to 7 percent in 1991, requires further reduction with tight economic management.

62. It is likely that developing countries like Mauritius face a challenge by investors who tend to refrain from investing in a country in the transition. Mauritius, in particular, is changing its technology from labour-intensive textile industry to capital intensive industry with trained workers in jewellery or light electric assembly.

63. In this economic scene, as the short-run effects, this transition could make investors relocate their factories in other developing countries with lower labour cost such as Madagascar.

It means that the level of the technology in host countries is more likely to be one of the important determinants of FDI from developing countries.

64. It could be pointed out that the experience in Mauritius showed few investment cases which proved successful in the framework of the sub-regional organisations. In general, there has been little cross-border investment in the sub-region of PTA and IOC, although they have been studying on facilitation of

22/ Industrial and Vocational Training Board (IVTB) was estab

lished in 1988 and became operational in 1989. More than 27,000 people have attended around 500 courses approved by the IVTB.

The IVTB is running Training Centres for training in the following areas: industrial electricity and electronics; fashion and design; footwear and leathercraft; hotel and catering; and jewellery.

investment flows in the region. One of a few cases exists in the investment from Zimbabwe with off-shore financing.

B. Lessons from Mauritius

65. A question is whether the success of Mauritius is relevant for Sub-Saharan Africa. Among many features related to the success of Mauritius discussed above, one of the key elements, which is relevant for all developing countries, is the following

feedback mechanisms between policy makers and the economic problems.

66, Firstly, the Government is establishing a network for better dialogue between policy makers and those who benefit from, or contribute to, the implementation of decisions in the overall economy. This network is meant to generate closer participation at the grass-root level in the decision-making process.

67 . Secondly, through this arrangement, th" ec.c-io-" \" r

programmes at the national, regional and international levels, are likely to be modified according to the external and internal shocks in economic and political environments surrounding Mauritius.

68. Finally, the restructuring of public administration system according to modern organization and management practices is one of important steps in that direction, in addition to the development and deepening of capital markets and the modernization of banking sector activities.

23/ Gulhati, Ravi and Nallari, Raj (1990), Successful Stabilization and Recovery in Mauritius, EDI Development Policy Case Studies, Number 5 (Washington, D.C., the World Bank).