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Confusion over FDIs and FTAs

Comments / {{hitsCtrl.values.hits}} Views / Thursday, 2 August 2018 00:00

‘$ 16 billion worth FDIs anticipated through the FTA with Singapore’. A headline last week that would have caught the eyes of many. Recently the CEO of Apple Inc., Tim Cook said, “The number one reason why we like to be in China is the people. China has extraordinary skills.” Clearly he was not referring to an FTA as the primary driver to move to China. On the contrary, he was still prepared to move to China despite the protectionist trade war between China and USA.

The need is for “ideal FDIs”, not any FDI

FDIs is something that a lot of experts had been harping over the last many years. The fact that Sri Lanka’s FDIs are poor compared to other developing nations such as Vietnam and the fact that FDIs are crucial to drive economic growth and so on. However FDIs should be the “driver” and not the “end result”. Put another way, the emphasis should be to attract the “Ideal FDIs” and not just any FDIs. 

The ideal FDIs we need to attract are the ones that would create more jobs, improve the income level of the people, increase Government revenue on a recurring basis and as a result drive long term economic growth. Such an outcome could be achieved mainly by high value add industries with an export bias. 

Failing to attract ideal FDIs

“Have we attracted such FDIs in the past?” A related question would be “Have we attracted reputed MNCs to invest in Sri Lanka with the objective of exporting to other countries?”. The answer to that is a definite no. Maybe with the exception of a few (including the Tourism industry which is clearly the leading industry to attract global brands since the ending of the war), we don’t have international brands who have shifted their operations to Sri Lanka. We import Toyotas and Hondas manufactured in Thailand, but does it occur to us why they could not be manufactured in Sri Lanka? 

Therefore when “experts” and “politicians” talk of FDIs, the questions one should ask is “Are we attracting the ideal FDIs? Have we created the environment to attract such FDIs? Are we attracting reputed brands such as ‘Toyota’ or ‘Samsung’?” 

Have FDIs really improved in recent past?

We could term all FDIs that don’t fall to the above “ideal” category as “other FDIs”. It seems most FDIs that we attract so far belong to this category. While there is a short term benefit from the inflow of foreign currency, the long term benefit of such FDIs is not that great as it may not achieve the criteria specified above (i.e. create more jobs, elevate income levels of the people and increase Government revenue on a recurring basis, etc.).

There has been a lot of publicity that FDIs have increased in the recent past and was close to $ 2 billion in 2017. A deeper analysis illustrates that the incremental FDIs would be due to the Colombo port city and Hambantota port developments. However it is not clear as to how many jobs would be created, whether these are high value add industries and the revenue to the Government in the long run etc. In fact it could be more to do with China’s desire to have a stronghold for obvious geo political reasons.

The other main FDIs in 2017 are the reinvestment of earnings/capital expenditure of telecom players (which is largely routine in nature and not actually a resurgence) and the real estate development projects. Both the real estate and telecom sectors are not industries that would directly earn a great deal of future foreign currency earnings and jobs, although the improvement in telecom sector could facilitate the development of such sectors. 

The above facts coupled with the fact that we haven’t attracted global brands clearly indicate that the performance of FDIs remain poor.

The false link between FDIs and FTAs

The implication that $ 16 billion worth FDIs are driven by the FTA with Singapore is also questionable. Intriguingly almost $ 15 billion out of that is on account of a single oil refinery project. The key questions that need to be answered are: “What are the potential export destinations for this project? How many jobs would be created for Sri Lankans? What’s the recurring (tax) revenue for the Government? Why is it not possible if not for the FTA? (put another way, what concessions were given under the FTA for the investor?) Is the investor a reliable, global brand, etc.?” Answers to this kind of simple questions would challenge the utterances of not only the “politicians” but also the “experts”.

While there is a tendency to link FDIs with FTAs, it is difficult to see the rationale. The simple logic is, non-existence of import tariffs or taxes may not be the primary reason for an investor to invest. As Tim Cook so eloquently pointed out, the primary evaluation for an investment would be based on the availability of key factors for the business to succeed and the availability of a compelling business model. 

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