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

Author

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  • Todd J. Moss

    ()

  • Vijaya Ramachandran
  • Manju Kedia Shah

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. Length: 30 pages

Suggested Citation

  • Todd J. Moss & Vijaya Ramachandran & Manju Kedia Shah, 2004. "Is Africa’s Skepticism of Foreign Capital Justified? Evidence from East African Firm Survey Data," Working Papers 41, Center for Global Development.
  • Handle: RePEc:cgd:wpaper:41
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    File URL: http://www.cgdev.org/content/publications/detail/2748
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    Cited by:

    1. Dupasquier, Chantal & Osakwe, Patrick N., 2006. "Foreign direct investment in Africa: Performance, challenges, and responsibilities," Journal of Asian Economics, Elsevier, vol. 17(2), pages 241-260, April.
    2. Jo Jakobsen & Indra de Soysa, 2006. "Do Foreign Investors Punish Democracy? Theory and Empirics, 1984-2001," Kyklos, Wiley Blackwell, vol. 59(3), pages 383-410, August.

    More about this item

    Keywords

    Africa; foreign capital; Kenya; Tanzania; Uganda; foreign direct investment;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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