Is Africa's Skepticism of Foreign Capital Justified? Evidence from East African Firm Survey Data

30 Pages Posted: 26 Mar 2008

See all articles by Todd J. Moss

Todd J. Moss

Center for Global Development

Vijaya Ramachandran

Center for Global Development

Manju Kedia Shah

World Bank

Date Written: June 10, 2004

Abstract

The world has increasingly recognized that private capital has a vital role to play in economic development. African countries have moved to liberalize the investment environment, yet have not received much FDI. At least part of this poor performance is because of lingering skepticism toward foreign investment, owing to historical, ideological, and political reasons. This wariness has manifested in many ways, including a range of business environment factors that impede greater foreign flows. Although much of the ideological resistance has faded, a number of specific challenges to the purported benefits of FDI have been successful in preventing more active liberalization and in moving to deal with indirect barriers. New data from firm surveys in Kenya, Tanzania, and Uganda suggest that there are important positive effects from FDI for both the host economies and the workers in foreign-owned firms. Based on our three-country sample, foreign firms are more productive, bring management skills, invest more heavily in infrastructure and in the training and health of their workers, and are more connected to global markets. At the same time, foreign firms do not appear to succeed by grabbing market share and crowding out local industry. These results suggest that many of the common objections to foreign investment are exaggerated or false. Africa, by not attracting more FDI, is therefore failing to fully benefit from the potential of foreign capital to contribute to economic development and integration with the global economy.

Keywords: economic development, foreign direct invesment, Africa

Suggested Citation

Moss, Todd J. and Ramachandran, Vijaya and Shah, Manju Kedia, Is Africa's Skepticism of Foreign Capital Justified? Evidence from East African Firm Survey Data (June 10, 2004). Center for Global Development Working Paper No. 41. Available at SSRN: https://ssrn.com/abstract=1112683 or http://dx.doi.org/10.2139/ssrn.1112683

Todd J. Moss (Contact Author)

Center for Global Development ( email )

2055 L St. NW
5th floor
Washington, DC 20036
United States

HOME PAGE: http://www.cgdev.org

Vijaya Ramachandran

Center for Global Development ( email )

2055 L St. NW
5th floor
Washington, DC 20036
United States

Manju Kedia Shah

World Bank

1818 H Street, N.W.
Washington, DC 20433
United States

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